Published May 07, 2013
European equities nudged higher on Tuesday, with sentiment boosted by a record high in the German DAX index, forecast-beating earnings and prospects of sustained central bank stimulus.
The DAX became the first of the major European indexes to breach the peaks set in 2007, rising as high as 8,173.19 points and following in the footsteps of the U.S. S&P 500 which has been setting record highs since mid-April.
The Frankfurt index has enjoyed popularity thanks to its strong exposure to faster growing foreign markets, its low weighting in volatile banks, the perception of Germany as a safe haven within the euro zone and the fact that unlike many peers it includes dividends as well as price returns.
"Our concern is obviously stability of the euro zone and the currency risk. We've seen Europe as two parts - Germany and the rest," said Christopher Aldous, chief executive at Evercore Pan Asset, which started adding German equities to its portfolios at the end of last year.
"It's got its economy well under control, it's managed to grow its exports outside of the euro zone, it is exporting into the high growth areas like U.S. and Asia and that's why it's doing so well. It's just in good shape."
Germany's economy was long resilient to the euro zone debt crisis, but it contracted at the end of last year. However, industrial orders data on Tuesday bolstered expectations that it has returned to growth.
Charts pointed to the scope for more gains on the German index, with David Furcajg, technical strategist at 3rd Wave Consult, highlighting 8,700 as a possible eventual target. He recommended holding on to long bets on the DAX as long as it does not close the 7,873.50-7,893.08 upside gap made last week.
The rally in the DAX gave a fillip to the broader European market pushing the FTSEurofirst 300 to fresh five-year peaks . The broad index was up 0.2 percent at 1,220.31 points by 1019 GMT, supported by some fresh money as London - Europe's top financial centre - reopened after a three day weekend.
A string of better than expected results - including from HSBC, Commerzbank, builder Skanska and brewer Carlsberg - helped support sentiment, bringing some unforeseen cheer to what has been a fairly mixed first quarter earnings season in Europe.
Implied volatility on EuroSTOXX 50 - a crude barometer of investor risk aversion based on options prices - fell to a six week low.
A rate cut in Australia overnight reinforced global central banks' commitment to continued stimulus, which has been a key driver of equity market gains in the past year.
In Europe, ECB President Mario Draghi on Monday reiterated that the central bank was ready to offer further economic stimulus if needed.
"From a very low base, everyone is fairly optimistic that things are going to improve and, if they don't, you've got the added backdrop from Draghi that he'll do whatever it takes to push the euro zone economy forwards," said Neil Marsh, strategist at Newedge.
"I think the markets are going to continue going higher."