Company Debt

DAX Dented by Rates Outlook

  • Why it matters

    Why it matters

    Tighter European monetary policy will punish Germany’s debt-laden companies, and could prompt a shift out of stocks into bonds.

  • Facts

    Facts

    • E.ON has the highest net debt ratio of any DAX-index company, at 4.5 times pretax earnings
    • Comments from ECB head Mario Draghi on June 27 sparked a rally in German bonds, and weakness in stocks
    • Companies with a cash surplus will benefit from rising interest rates
  • Audio

    Audio

  • Pdf
German stocks may lose their allure if the ECB tightens monetary policy. Source: DPA

Ever since Mario Draghi, head of the European Central Bank, hinted at tightening monetary policy last month, Germany’s blue-chip DAX index seems to have lost its mojo. The prospect of rising interest rates, and of the ECB curbing its billion-dollar quantitative easing program – a monthly purchase of mainly sovereign debt the central bank started in 2015 – threatens to spoil an eight-year stint of rising stock prices.

The reason for the dumpy DAX? German bonds may be back in fashion. “Suddenly there’s an alternative to shares again,” said one Frankfurt trader.

Speaking to an audience of students in Sintra, Portugal, on June 27, Mr. Draghi made comments that some interpreted as a sign the central bank would soon curtail, or even discontinue, its aggressive stimulus package. Since then, stock prices of debt-laden companies have crumbled, while those of firms with surplus cash have surged. German bonds, previously snubbed by investors seeking better returns, have also rallied.

Want to keep reading?

Subscribe now or log in to read our coverage of Europe’s leading economy.