Financial Markets Recap: Utility Debt Worries Weigh on Dax Amid Moody's Downgrade and Tax Proposals
Cryptocurrency Hits New Peak - Steep Declines for Freenet and Eventim
Concerns over escalating U.S. federal debt and President Trump's contentious tax plans have dampened investor sentiment, with the Dax index dipping below the 24,000-point benchmark yesterday, marking a 0.5% decline to 23,999 points. This setback overshadows the index's record-breaking high achieved the previous day. Nevertheless, the year-to-date gain remains in excess of 20%.
Analysts worry that the looming debt, which could potentially escalate due to the controversial tax proposals, may compromise financial stability. The House of Representatives narrowly passed the proposed tax package on Thursday, signaling its impending move to the Senate. Projections indicate that these tax plans could result in additional debts of $3 to $5 trillion. The Economy currently carries a debt load of $36.2 trillion. According to financial expert Francesco Pesole of ING, Trump's moves are akin to playing with fire. Last week, Moody's, the last of the three major American rating agencies, downgraded the U.S. due to budgetary concerns, stripping it of its top rating. For 20- and 30-year bonds, the U.S. now offers interest rates above 5%, a development Andreas Lipkow, a market observer, describes as an escalating problem for financial markets. With higher yields on the bond market, investments in equities become less attractive.
Despite the Ifo business climate index revealing an improvement for the fifth consecutive month in May, the Dax did not receive a significant boost. Economic data, as well as disappointing performances from various German companies, also contributed to the overall dampened mood. Freenet's quarterly figures fell short of investor expectations, causing a 17% plunge in the telecommunications provider's shares and dimming the hopes for the media sector. Barclays analyst Mathieu Robilliard described the start of the year as slow and the results as weaker than anticipated, while Oddo BHF downgraded the stock to "Underperform."
Meanwhile, ticketing company CTS Eventim's profit decline soured investor spirits, with the loss temporarily reaching 9% after dividend payout adjustments. Other German companies, such as Porsche AG and Puma, also suffered share-price declines due to dividend cuts.
Hornbach Holding's stock marked one of the weakest performances in the DAX. Investors struggled with expectations following the company's business report, with Thilo Kleibauer of Warburg Research raising his price target to 117 euros but remaining below the closing price. Felix Dennl of Metzler increased his price target to 89 euros but exercised caution, warning against overestimating the strong start to the year and expecting the same for the rest of the year.
At the Stockholm Stock Exchange, Embracer's outlook weighed on its shares, with the Swedish video game developer's stock plummeting by over 16%. The company expects its net sales for the 2025/26 fiscal year to slightly exceed last year's level, with operating profit remaining relatively stagnant. This projection falls below consensus, according to analyst Vincent Edholm at Pareto Securities.
Bitcoin rebounded on Thursday, hitting a new record high of $111,862, marking a 3.3% increase at its peak. The cryptocurrency has risen more than 7% since Monday, recently prompting predictions that investors may be eyeing the next milestone of $120,000. Gold also gained ground, inching up 0.9% to a two-week high of $3,345 per ounce, approaching its record high of $3,500.05 per ounce set at the end of April.
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In light of the rising U.S. debt levels and the challenges in addressing it through fiscal reforms, financial markets face heightened risks induced by increasing borrowing costs, shifting investor preferences, and slower economic growth. The Moody’s downgrade highlights that these risks are now materially relevant globally. Borrowers and investors must navigate this environment cautiously, balancing allocations, and considering rate-lock strategies amidst uncertainty.
Business analysts are expressing concerns about the potential impact of escalating U.S. federal debt and controversial tax proposals on the financial markets, as these factors could compromise financial stability and lead to additional debts of $3 to $5 trillion. Such developments might shift investor preferences towards safer assets like bonds, making investments in equities less attractive.
In the context of the Dax index, concerns over the looming debt and the regulatory environment could discourage investing in German businesses, as other factors such as disappointing performances from various German companies and declines in shares of companies like Freenet and CTS Eventim have already contributed to the overall dampened sentiment.
