Investment Climate: Iran, Inflation, Interest Rates – DAX Falls to Ten-Month Low

The escalating conflict involving Iran is increasingly weakening the stock markets. Germany's benchmark DAX index has fallen below the 23,000 point mark, and gold prices have also declined.

Global economic concerns intensified investor exodus from stock markets on Thursday. Domestically, the DAX came under significant pressure, temporarily falling to a low not seen in ten months. By midday, the German leading index had dropped by 2.4 percent, settling at 22,945.11 points. The sharp rise in oil prices is increasingly fueling fears of a significant surge in inflation. A barrel (159 liters) of North Sea Brent crude, following its latest jump, is now nearly $115.

Iran Triggers Market Chain Reaction

"The Iran conflict has reached a new level of escalation with the attack on a gas field," stated Jochen Stanzl, Chief Market Analyst at Consorsbank. "Every attack on critical energy infrastructure robs the market of hope for a swift return to previous production levels, even if the war were to end." The MDax, which tracks medium-sized companies, lost 2.7 percent, falling to 28,722 points, and substantial losses were also recorded across Asia and Europe.

Further headwinds for equities emerged at midday from the European Central Bank (ECB). Although the ECB maintained its deposit rate at 2.0 percent, markets are now almost certain that two interest rate hikes will occur this year. Prior to the outbreak of the conflict, interest rate cuts were generally expected, which would have been beneficial for stocks. Such cuts would have made the safe alternative — parking money with the ECB — yield less, thereby making stock gains relatively more attractive.

Conversely, the higher interest rate expectations led to rising bond yields and, consequently, falling bond prices – a logical market mechanism. Newly issued bonds ultimately offer higher yields than bonds issued a year ago with lower interest rates. Accordingly, the value of older bonds decreases when interest rates (or expectations thereof) rise.

The Euro also benefited from the decision, gaining 0.4 percent against the US dollar to reach $1.1499. The higher future yield on ECB deposits makes the Euro relatively more attractive. Gold, for the same reason, lost 5.5 percent.