Berlin, Germany – Germany’s economic sentiment has unexpectedly risen in October, signaling a significant rebound from September’s dismal levels. This positive shift is driven by growing optimism regarding potential interest rate cuts and an improved export outlook.

According to the latest figures from the ZEW Economic Sentiment Index, which gauges the expectations of financial market experts, sentiment surged to 13.1 points this month, up from just 3.6 points in September. This increase surpassed analysts’ expectations of 10 points, marking a notable shift in economic morale for the nation.

Despite this hopeful outlook, the assessment of current economic conditions continues to decline, with the relevant indicator dropping by 2.4 points to a concerning minus 86.9 points. This suggests that while there is optimism for future improvements, nearly 90% of survey respondents still view the present economic landscape negatively.

Factors Driving Optimism

The recent uptick in sentiment comes from expectations of stable inflation rates and possible further interest rate cuts by the European Central Bank (ECB). Professor Achim Wambach, President of the ZEW, pointed out that positive developments in key export markets such as the United States, China, and the eurozone have contributed to this renewed optimism.

“The increased optimism for China is likely linked to the Chinese government’s economic stimulus measures, which have probably also contributed to the rise in economic expectations for Germany,” Wambach said.

The broader eurozone sentiment followed a similar trend, with the ZEW indicator for the region’s economic sentiment rising by 10.8 points to reach 20.1 in October, suggesting a growing belief in the eurozone’s resilience. However, like Germany, the current situation in the eurozone remains challenging, as the assessment of current conditions dipped slightly to minus 40.8.

DAX Index Reaches New Heights

The improved economic sentiment was mirrored in Germany’s stock market, with the DAX index achieving record highs on Tuesday. The index rose by 0.3% to close at 19,600 points, surpassing its previous peak set in September. This boost is attributed to falling oil prices and a weakened euro, benefiting Germany’s energy-dependent, export-led economy.

MTU Aero Engines AG led the DAX’s gains, with shares jumping over 4% after the company raised its earnings guidance for 2024. Other notable performers included sportswear manufacturer Puma, utility company E.ON, and sports giant Adidas, which rose by 3.3%, 2%, and 1.3%, respectively.

In contrast, other European indices struggled, with the Euro STOXX 50 down 0.4%, Milan’s FTSE MIB falling 0.5%, and the CAC 40 in Paris declining by 0.9%. These declines were influenced by weaknesses in the luxury sector, where French brands like LVMH, Kering, and Hermes faced losses amid concerns over Chinese fiscal stimulus.

Market Reactions and Future Expectations

Oil prices have also played a role in boosting German equities, with Brent crude plunging over 4% to $74 a barrel due to reports suggesting that Israel may opt for a limited military response, avoiding attacks on Iranian energy infrastructure. Meanwhile, the euro continued its downward trend, weakening to $1.09, marking its 11th negative session in the past 13 trading days.

Investors are now closely monitoring the upcoming ECB meeting on Thursday, where a second consecutive interest rate cut is anticipated. Such a move could further influence the euro’s performance, while German Bund yields remain steady at 2.25%.

Thyssenkrupp is reconsidering its ambitious plans to produce “green steel,” a shift aimed at achieving climate-neutral production, according to an internal report cited by the German newspaper Handelsblatt. The company’s leadership, including CEO Miguel Lopez, has launched a comprehensive review of its direct reduction plant (DRI) project, initially set to commence operations in 2027. This facility was designed to utilize hydrogen in steel production rather than coal, a move towards more sustainable practices.

The German federal government and the state of North Rhine-Westphalia have pledged €2 billion to support the initiative, with €500 million already disbursed as state subsidies. If Thyssenkrupp decides to cancel the project, it would face the daunting task of repaying these funds. A spokesperson for the company stated, “The situation is currently being reviewed,” while maintaining that the DRI plant’s implementation remains feasible under the current framework, despite potential cost increases not affecting the subsidies at this time.

Thyssenkrupp’s steel division has been grappling with significant challenges, as evidenced by disappointing financial results reported in June, where both net income and profits saw dramatic declines amidst rising operating expenses. The steel unit has undergone a major management overhaul, resulting in the appointment of a new CEO, chair, and five directors following several high-profile resignations. These departures were fueled by a takeover battle initiated by Czech billionaire Daniel Křetínský, who acquired a 20% stake in the steel business and is poised to buy an additional 30%.

Additionally, the company faced a setback this week when the Court of Justice of the European Union upheld the European Commission’s 2019 anti-trust ruling against Thyssenkrupp’s proposed joint venture with Tata Steel Europe, which would have created Europe’s second-largest steelmaker.

Thyssenkrupp’s steelmaking division is under pressure from intense competition from Asian markets, alongside soaring energy prices and diminishing demand in Europe. These factors complicate the company’s ability to meet climate requirements, necessitating substantial investments for transition to more sustainable practices.

Despite these hurdles, Thyssenkrupp emphasized its commitment to transitioning to climate-neutral steel production. “There is no way around the decarbonization of CO2-intensive steel production in the long term,” the company stated. Following the news, Thyssenkrupp’s shares dipped nearly 5% during midday trading in Germany.