DAX fails to hold gains as US inflation rises more than expected

By midday, the DAX was once again heading towards its previous record highs, climbing as high as 26,640 points. However, as Wall Street opened and US share prices began to fall, profit-taking also set in on the German market.

US inflation dampens hopes of rapid relief

Earlier, US consumer prices had risen more sharply than expected, bringing inflation risks back into focus. The effects of the preceding period of elevated energy prices are apparently increasingly feeding through into broader price developments. Recently published import price figures had already pointed to persistent cost pressures. Hopes that falling crude oil prices would quickly translate into lower inflation have therefore suffered an initial setback.

Bond yields return to the spotlight

This makes the situation increasingly challenging for the Federal Reserve. The unexpectedly high consumer price figures could reinforce expectations of another interest rate hike. At the same time, financial markets are proving particularly sensitive to changes in the inflation outlook. Investors are increasingly focusing on government bond yields. Rising yields push up financing costs for businesses and consumers while making fixed-income investments more attractive relative to equities. For highly valued growth companies in particular, this can quickly translate into renewed selling pressure.

Geopolitical hopes collide with interest rate concerns

Two opposing forces are therefore colliding in equity markets. On the one hand, there are hopes of geopolitical de-escalation, falling energy prices and an economic recovery. On the other, persistent inflation threatens to restrict central banks' room for manoeuvre on monetary policy once again. Investors are consequently having to reassess their expectations almost daily as market conditions change. What was considered a compelling argument for rising share prices yesterday can already be overshadowed by renewed interest rate concerns today.

DAX outlook remains constructive but uncertain

Despite the latest uncertainty, the overall backdrop for the DAX remains constructive for now. Hopes of peace and declining energy prices continue to support the outlook for the European economy. However, a sustained breakout to fresh record highs will require more than geopolitical optimism. As long as US inflation continues to deliver unwelcome surprises, bond yields will remain the decisive source of uncertainty for equity markets.