The DAX index saw a modest increase at the end of the week, buoyed by a surge in German business sentiment and encouraging private sector data that helped restore investor confidence. The Ifo Business Climate Index rose for the first time in six months, providing a glimmer of hope.
On Friday, the DAX climbed 0.2%, reflecting growing optimism among investors as German business sentiment displayed early signs of recovery, bolstered by positive private sector activity surveys.
The Ifo Business Climate Index, a key indicator of German economic confidence derived from approximately 9,000 business responses, rose to 86.5 in October from 85.4 in September, exceeding market expectations of 85.6. This marked the first increase in half a year.
Improving Sentiment Among Businesses
Clemens Fuest, President of the Ifo Institute for Economic Research in Munich, noted that while German businesses are more optimistic about their current situation, there remains caution regarding future prospects. “Sentiment among companies in Germany has improved. Companies are more satisfied with their current situation,” he stated. He added, “Expectations are brighter but still marked by skepticism. The German economy has temporarily halted its decline.”
Germany’s manufacturing sector, which has faced significant challenges this year, showed signs of stability as companies became slightly less pessimistic about future conditions. Although demand for orders remains weak, with capacity utilization dropping by 1.2 percentage points to 76.5%, there are indications that the sector’s downturn may have stalled. However, this figure is still significantly below the long-term average of 83.4%.
The service sector, in contrast, experienced more pronounced improvements, with the Business Climate Index moving back into positive territory, particularly in logistics, tourism, and IT.
Mixed Signals Across Sectors
Other sectors presented a varied picture. In trade, sentiment improved slightly, though satisfaction with current business conditions remains low. Meanwhile, the construction outlook worsened due to rising pessimism, even as companies viewed the current situation with slightly more optimism.
Stronger-than-expected Purchasing Managers’ Index (PMI) reports released on Thursday indicated a faster-than-anticipated expansion in Germany’s services sector and a slower contraction in manufacturing activity for October. Nevertheless, the overall PMI Composite Output Index remains in contraction territory, reflecting ongoing pressures on Germany’s economy, including high energy costs, increasing competition from China, and labor shortages affecting manufacturing.
“The services sector has resumed its role as a stabilizing force for the overall economy,” remarked Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, suggesting this shift could indicate “light at the end of the tunnel” for German manufacturing.
Market Reactions and Volkswagen Earnings Outlook
German stocks have seen a slight rally over the past two sessions, gaining 0.3% on Thursday and similar gains on Friday. The day’s top performers included Daimler Truck Holding AG, up 3.9%, Siemens Energy AG, up 2.3%, and Puma SE, up 2.2%.
However, the DAX remains down 0.9% for the week, about 1% below its recent all-time high of 19,675 points reached last week.
Looking ahead, market focus will shift to major corporate earnings next week, with Volkswagen AG scheduled to release its quarterly results on October 30. Analysts project earnings of €3.85 per share and revenues of approximately €75.6 billion, a significant drop from the €7.76 per share and €78.85 billion in revenue reported for the same quarter last year. Volkswagen shares have plummeted over 70% from their peak in 2021.
