Should you buy German stocks amid the PPI decline in October?
- German stocks are attractive as the PPI declines for the first time in two years
- EUR/USD and Dax move in a direct correlation
- If inflation has peaked in Europe, more upside is possible for both the EUR/USD and the Dax index
The COVID-19 pandemic led to an unprecedented response from central banks and governments. To support economies and households, vast sums of money were needed.
The fear was that inflation would rise uncontrolled by pumping the money into economies that were literally shut down. And so it did.
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Inflation is much higher than central banks’ targets. For instance, in the United Kingdom, it exceeded 11% YoY. Also, it recently climbed above 10% YoY in the euro area.
Central banks did react. And governments too.
Both monetary and fiscal policies have tightened. Yet, the signs of inflation coming down were missing.
That is, until recently.
The last inflation report out of the United States was encouraging. It showed inflation might have peaked in October.
The news triggered a wave of stock buying worldwide. Not only the US equity market jumped but other ones in sympathy.
Yesterday, when no one was looking, Europe got some good news out of Germany. The PPI, or Producers Price Index, declined for the first time in more than two years.
Wholesale energy costs were responsible for most of the decline. So has inflation reached its peak?
Because changes in the PPI are transmitted to consumers, the hope is that inflation in Europe has peaked or is close to doing so.
Is it time to buy German stocks?
Dax and EUR/USD move in tandem
A direct correlation between the German stock market and the EUR/USD might be spotted. The German Dax index and the EUR/USD both fell by about -9% this year.
With inflation giving signs of a peak, is it time to buy German stocks? Sure enough, the Dax outperformed the major US indexes, such as the S&P 500 or the Dow Jones.
If the energy prices keep decreasing, as they did in October, more investors will turn their attention to German stocks just as they did to EUR/USD.