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The German benchmark index the DAX 40 has been rising steadily since October 2022 with an increasing number of investors thinking that a more dovish turn from the European Central Bank (ECB) is probably going to be seen soon, despite the fact the ECB raised interest rates by 50 basis point last week and signalled that another 50 basis point hike next month is on the agenda.
Several officials have re-iterated more hikes are coming as the battle with inflation is not over yet, and if underlying inflation pressures do not materially abate, maintaining the current pace of hikes into May could be seen.
Investors are also expecting the German economy could stagnate in 2023 rather than deteriorate further, focusing on signs that inflation is peaking, making them slightly less pessimistic than they were last autumn.
However, if worries about a possible global recession reignite again, the equity market may quickly pull back from its current elevated levels. We recognise the risk the latest rally may turn out to be a substantial bear market rally and the potential of large declines in the months ahead.
The delated January estimate of German inflation was released on Thursday, revealing a gradual decrease in inflation without offering any relief. The annual headline inflation edged higher to 8.7%, a slight increase from 8.6% in December. For the ECB, Thursday’s reading of the German headline inflation shows how slow and gradual the disinflationary process in the euro zone will be.
The monthly increase of 1.0% indicates that inflationary pressures are far from abating, reversing a 0.8% decrease in December, when a federal one-off payment to cover the monthly instalment for gas and heat for all households and small- to medium-sized businesses came into effect, as such pressuring the inflation down.
Meanwhile, the annual HICP measure came in at 9.2% vs 10% expected, and a decrease from 9.6% in December. German inflation slowed in January to the lowest level in five months thanks to further government support to ease the pressure on households from soaring energy costs.
Publication of Germany’s inflation data was delayed last week because of “an unexpected technical problem”, which the federal statistical agency said was linked to the change of its base year for price statistics from 2015 to 2020. That probably helps to explain why the HICP annual inflation rate moved in the opposite direction.
Interpreting the data is complicated by regular re-pricings of households’ energy contracts and number of relief measures from the government. There was also an update to the consumer-price basket that Destatis uses for its calculations. Because of that change, the agency didn’t publish a breakdown of the separate components.
The German statistical office did not provide Eurostat with its numbers last week, so the impact of this on the first eurozone inflation estimate remains to be seen. However, it is likely that the initial estimate of 8.5% YoY will be revised upward slightly when final figures are published on the 23rd of February.
The path to lower inflation rates will not be straightforward, as it is currently being driven by lower energy prices and government interventions rather than a broader disinflationary process. The ECB has noted that the disinflationary process in the eurozone will be slow and gradual and is focusing on core inflation and projections as a better indicator of inflation.
Policymakers are worried that underlying price pressures are stubborn as core inflation remained at a record 5.2% in January and could ignite a wage-price spiral, which could require even higher interest rates.
Active traders looking for magnified exposure to the German benchmark index may consider our 3x Long Germany 40 and -3x Short Germany 40 ETPs.
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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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