Dax hits an all-time high amid strong IFO data and M&A activity

The Dax is leading the charge higher in Europe, following on from a strong close on Wall Street. A combination of M&A activity, upbeat IFO business sentiment data and easing US inflation fears have helped drive the German equities market to a fresh all-time high.

The German GDP reading revealed a downward revision to -1.8% contraction quarter on quarter in Q1, from -1.7% in the previous reading. However, this morning’s disappointing GDP print is already in the rear-view mirror. Not only does it relate to the first quarter, but the backward-looking data has been overshadowed by a strong May reading of the German IFO index.

Germany’s leading indicator rose to a two-year high of 99.2 in May, up from 96.6 in April. The stronger-than-forecast print suggests that optimism over Germany’s economic outlook is on the rise. The current assessment and the expectations components of the gauge rose, with expectations at their highest level since January 2011. The ramping up of the vaccine programme and the easing of lockdown restrictions are clearly boosting morale.

Tech stocks are rallying after the Nasdaq outperformed its peers overnight. Easing inflation fears are most beneficial for high-growth tech stocks.

The real-estate sector is also in focus as two of Germany’s largest property developers are set to merge in a EUR18 billion real estate deal. Vonovia SE agreed to acquire its rival, Deutsche Wohnen, creating a landlord that will own more than 500,000 residential properties in Germany, Sweden, and Austria. There’s nothing like a bit of M&A action to put a spark into the markets.

Stateside, US futures are heading higher, extending gains from the previous session. As base metal prices extend losses and the Fed continues to sing from the dovish hymn sheet, tech stocks look set to extend their lead.

GBP rises as public sector net borrowing falls

The greenback continues to lose ground, with the US dollar index trading sub 90.00, hovering around multi-month lows as inflation concerns ebb. The Fed continues to share its dovish rhetoric, insisting the current rise in inflation is temporary and the market appears to be coming around. A temporary spike in inflation does not warrant a tightening of policy by the Fed.

The principal beneficiary of a weaker US dollar, the euro is also supported by improving business sentiment in Germany.

The pound is extending gains for a second session and looks to target 1.42 after encouraging public sector net borrowing data. The British government’s huge public sector borrowing started to recede in April for the first time since the start of the pandemic. Public sector net borrowing reached GBP31.7 billion in April, down from a record GBP47.3 billion a year earlier when public finances felt the biggest hit from the pandemic. The quick vaccine rollout, steady progress along the re-opening path and improving economic outlook point to a potentially speedier improvement in public finances going forwards.

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