Overview

On Friday, Germany’s Dax index achieved a significant milestone by reaching a record high, establishing itself as the first major European stock market to recover from declines linked to prior tariff threats made by former U.S. President Donald Trump. This rebound can be attributed to renewed investor confidence stemming from recent U.S. trade negotiations.

Factors Contributing to the Dax’s Record Surge

The Dax climbed 0.7 percent following a favorable announcement regarding a U.S.-UK trade agreement. A subsequent conversation between U.S. President Trump and Germany’s newly elected Chancellor Friedrich Merz highlighted the importance of expeditiously settling trade disagreements. In a related diplomatic move, the U.S. and China are scheduled to convene this weekend to address ongoing tariff tensions.

Chancellor Merz’s Diplomatic Approach

In his inaugural address, Chancellor Merz emphasized the necessity for Europe to seek greater autonomy from the United States. However, he also acknowledged the vital role of the U.S. as an “indispensable friend and partner.” According to a statement from a German government spokesperson, the two leaders have agreed to meet soon to further discuss these issues.

Market Dynamics and Investor Sentiment

The Dax’s resurgence mirrors the increased enthusiasm surrounding German equities, sparked by Merz’s plans for enhanced borrowing and the allocation of substantial funds into the nation’s military and infrastructure sectors. Emmanuel Cau, who leads European equity strategy at Barclays, noted that the positive trade developments have collectively boosted stock markets across the board, with particular sentiment skewed favorably towards Germany amidst the new governmental strategies.

Bond Market Response

Despite the rally in the stock market, German bonds, which had recently benefitted from market instability, experienced a decline. The yield on 10-year German government bonds saw a slight uptick of 0.06 percentage points, rising to 2.58 percent, as investors shifted towards riskier assets.

European vs. U.S. Market Performance

This year, European stocks have consistently outperformed their U.S. counterparts, buoyed by optimism related to defense expenditures and heightened concerns regarding the adverse effects of Trump’s trade policies on the U.S. economy. As of now, the Dax is up nearly 18 percent year-to-date, driven in part by a notable increase of over 170 percent in defense-related stocks like Rheinmetall. German banking stocks have also shown robust performance, with shares of Deutsche Bank rising 43 percent this year.

Outlook and Caution

While U.S. equities have largely recovered their losses since Trump’s tariff declarations in early April, the S&P 500 remains approximately 4 percent below its record high achieved in February. According to Laura Cooper, a global investment strategist at Nuveen, “Peak trade fear is behind us.” However, she cautioned that fluctuations in market prices are likely as tariff-related disruptions continue to affect the global trading landscape.

Investment managers advise caution as well, recognizing the persistent uncertainty surrounding U.S. policymaking and trade rhetoric. Kevin Thozet, a member of Carmignac’s investment committee, remarked, “For now, this [rally] is holding,” but emphasized that ongoing uncertainty could challenge the sustainability of current trends.