The German DAX index edged 0.2% up on Friday, lifted by growing investor optimism as German business sentiment showed its first signs of improvement in months, coupled with upbeat signals from private sector activity surveys.
The Ifo Business Climate Index, a closely watched measure of German economic confidence based on approximately 9,000 business responses, rose to 86.5 in October from 85.4 in September, surpassing market expectations of 85.6 and marking the first increase in six months.
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Business sentiment on the rise, says Ifo institute
The Ifo Institute for Economic Research, based in Munich, noted that German businesses were more positive about their current situation, although caution lingers around future prospects. "Sentiment among companies in Germany has improved. Companies were more satisfied with their current situation,” said Ifo President Clemens Fuest. He added, “Expectations were brighter but marked by scepticism. The German economy stopped the decline for the time being.”
Germany’s manufacturing sector, which has faced significant challenges this year, showed a glimmer of stability as companies became slightly less pessimistic about future conditions. While demand for orders remains weak, with capacity utilisation falling by 1.2 percentage points to 76.5%, there are hints that the sector’s downturn may have halted. However, this rate is still well below the long-term average of 83.4%.
The service sector, meanwhile, saw more decisive improvements, with the Business Climate Index returning to positive territory, especially in logistics, tourism, and IT.
Other sectors presented a mixed picture. In trade, sentiment improved slightly, though satisfaction with current business conditions remains subdued. In construction, the outlook worsened due to increased pessimism, even as companies viewed the current situation somewhat more positively.
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Stronger-than-expected PMI surveys
On Thursday, Flash Purchasing Managers’ Index (PMI) reports revealed a faster-than-expected expansion in Germany's services sector and a slower rate of contraction in manufacturing activity in October.
Yet the overall PMI Composite Output Index remains in contraction, highlighting the persistent pressures on Germany’s economy, including high energy costs, rising Chinese competition, and labour shortages impacting manufacturing.
“The services sector has resumed its role of stabilising the whole economy,” remarked Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding that this shift could point to "light at the end of the tunnel" for German manufacturing.
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German stock reactions and Volkswagen earnings outlook
German equities experienced a mild rally over the last two sessions, gaining 0.3% on Thursday and posting similar gains on Friday.
The day’s top performers were Daimler Truck Holding AG, up 3.9%, Siemens Energy AG, up 2.3%, and Puma SE, up 2.2%.
Nevertheless, the DAX is down by 0.9% for the week, remaining about 1% below its recent all-time high of 19,675 points reached last week.
Looking ahead, market attention is shifting to major corporate earnings next week, with Volkswagen AG set to release its quarterly results on 30 October.
Analysts are projecting earnings of €3.85 per share and revenues around €75.6 billion, significantly down from the €7.76 per share and €78.85 billion in revenue posted for the same quarter last year. Volkswagen shares have plunged over 70% from their 2021 peak.
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