The Dax, Germany’s leading stock index, has reached a historic milestone, surpassing the 19,000-point mark for the first time ever. This achievement is largely attributed to recent changes in monetary policy, with declining interest rates providing a significant boost to the German stock market.
Record-breaking performance driven by monetary policy
On September 19, the Dax surged by 1.6 percent, closing just above the new record level of 19,000 points. This rise marks a significant milestone, surpassing the previous peak of 18,000 points reached in mid-March. The rally in the index is linked to recent actions by central banks, notably the Federal Reserve’s reduction of interest rates by 0.5 percentage points for the first time since the onset of the COVID-19 pandemic. Experts anticipate another rate cut by the Fed in December. Additionally, the European Central Bank (ECB) also lowered its rates by 0.25 percentage points last week.
The impact of lower interest rates on stocks
Falling interest rates are seen as a boon for stock investors. As rates decrease, stocks become more attractive compared to fixed-income securities. Lower borrowing costs make it easier for companies to secure financing, thus making investments more affordable. The trend towards further monetary easing by central banks is expected to improve financing conditions even more. This is underscored by the recent drop in Germany’s inflation rate, which fell below the 2 percent mark. According to preliminary figures from the Federal Statistical Office, the inflation rate in August was 1.9 percent, down from 2.3 percent in July and 2.2 percent in June. The inflation rate, calculated according to uniform European standards, dropped to 2.0 percent in August. The ECB’s target inflation rate for the Eurozone is 2 percent, leading to market speculation about another rate cut in September.
Market optimism amid economic challenges
The bullish trend in the stock market contrasts with the current weak economic conditions in Germany. Investors often focus on future profits rather than the present economic climate. Additionally, many of the 40 companies listed on the Dax operate internationally, meaning Germany is just one of many markets for these firms.
The Dax’s recent performance follows its previous breakthroughs of the 15,000 and 16,000-point levels in March and August 2021, respectively, as global stock markets recovered from the pandemic’s lows. At the start of the pandemic, the index had plummeted to 8,255 points. Despite ongoing economic challenges, such as the war in Ukraine and conflicts in the Middle East, the Dax has made a remarkable recovery.
