DAX index hits ATH, German economy crumbles: here’s why

German stocks have diverged with the country’s economy. The blue-chip DAX index has jumped for seven consecutive days to a record high of €18,912. It has soared by over 11% from its lowest point this month and by 30% from last year’s low. 

The German economy is ailing

The DAX index has surged hard even as signs show that the German economy is ailing. Data released this month shows how badly the economy is doing.

On August 1, a report by S&P Global showed that the composite PMI dropped from 50.4 to 49.1 in July. A PMI reading of less than 50 is usually a sign that a sector is in a contraction mode. 

A recent report showed that the conditions worsened in August as the flash manufacturing and services PMIs dropped to 51.4 and 42.1 in August. The composite PMI deteriorated to 48.5 during the month. 

The other notable report came out this week that revealed that the German economy contracted by 0.1% in Q2 after growing by 0.2% in the first quarter. 

Also, business and consumer confidence continued to deteriorate. The GfK consumer climate figure dropped from -18.6 in August to 22.0 in September while the Ifo business climate index fell to 86.6.

These numbers mean that the country’s economy is ailing and that the situation may get worse in the coming months.

The German economy is struggling because of the ongoing de-industrialization as many companies in the country shift their operations abroad.

These companies have lamented about the rising cost of doing business, especially after Russia stopped delivering natural gas to the country. 

There are also concerns about the regulatory state, both from the national and the European Union levels.

In the future, Germany faces a major challenge because of its reliance on the automotive industry that is seeing huge changes. 

For a long time, companies like Volkswagen, BMW, Mercedes-Benz, and Porsche have been big employers in Germany. Now, China has emerged as one of the biggest players in the auto industry, especially in the EV sector. 

Easing monetary conditions

The first reason why the DAX index is soaring is that key central banks have started to slash interest rates.

The European Central Bank (ECB) has already cut rates by 0.25% and hinted that more cuts were on the way. This is a big reversal for a central bank that hiked rates to a record high as the bloc’s inflation surged.

Other European central banks like the Bank of England (BoE) and the Swiss National Bank (SNB) have also cut rates.

Most importantly, the Federal Reserve has hinted that a cut was coming in its September meeting. What is unclear is the size of the cut. Some analysts expect that the bank will slash them by 0.25% while others see a 0.50% cut.

The size of the cut will mostly depend on next week’s non-farm payrolls (NFP) data. If these numbers show that the unemployment rate continued rising, then the bank will cut by 0.50%. 

Stocks tend to do well when central banks have embraced a dovish tone because of the rotation from bonds to equities. 

Correlation with global stocks

Second, the DAX index rally has also coincided with that of other global indices. In the US, indices like the Dow Jones, Nasdaq 100, and S&P 500 have all jumped to a record high.

Similarly, in Europe, the FTSE 100 index and CAC 40 have soared while in Asia, the Nifty 50 and BSE Sensex have also jumped. In most cases, global stocks tend to be highly correlated with each other. 

Third, while the DAX is a German index, many of its constituent companies do a lot of business abroad. For example, companies like BMW, Volkswagen, Merck, Allianz, and Adidas generate most of their sales in other European countries and in North America.

Many companies in the DAX index have done well this year. Rheinmetall share price has jumped by more than 89% as European countries boosting their defense spending. SAP has soared by 42% because of its role in the artificial intelligence industry.

Other top gainers in the DAX index were MTU Aero, Siemens Energy, Merck, Commerzbank, and Deutsche Bank have also rallied by over 20%.

DAX index forecast

The daily chart shows that the DAX index has continued soaring in the past few days. It has crossed the crucial resistance point at €18,880, its previous highest on record.

The index has remained above the 50-day and 100-day Exponential Moving Averages (EMA), meaning that bulls are in control.

Also, the MACD has moved above the neutral point while the Relative Strength Index (RSI) has moved to the overbought point, meaning that it has the momentum.

Therefore, the index will likely continue rising as bulls target the key resistance point at €20,000.