Bond yields and the oil price slow the Dax, the losing streak ends

The short version

• The Dax ended a three day losing streak with a gain on Thursday evening.
• Rising bond yields and high oil prices had weighed on it before.
• The recovery was supported by signals for a possible rate pause in the United States.

The trading day

The Dax ended a three day losing streak with a gain on Thursday evening. Rising bond yields and high oil prices had pushed prices down before that.

The recovery was supported by signals for a possible rate pause in the United States. Two senior central bankers had spoken against an increase any time soon.

The connection between bonds and shares is often overlooked and is still the most important one on trading days like this. Three losing days and a gain on the fourth are hard to explain without it, because at company level nothing had happened that would carry the move.

What is also striking is where the triggers came from. Neither the burden nor the recovery had its origin in Germany.

Why yields act on shares

Companies whose profits lie far in the future react particularly sensitively. The later a profit arrives, the more a higher interest rate changes its present value. For a business that already earns now, the same interest step weighs less.

That explains why a trading day without any company news can still bring clear price moves. What has changed is not the business but the yardstick by which it is valued.

The same holds in reverse. When two senior central bankers spoke against an increase any time soon, nothing changed in a single annual report. What changed was the expected interest rate against which future profits are discounted, and that was enough for a gain.

The oil price as the second factor

The second burden is the oil price. It works through the costs of energy intensive industries and through inflation expectations, which in turn feed back into interest rates.

That closes the circle to the first factor. A high oil price raises expected inflation, higher expected inflation lets yields rise, and rising yields push share prices down. Both burdens on the Dax are therefore connected.

The route through costs is the obvious one. Anyone who needs a lot of energy to produce earns less when oil is expensive, unless the higher costs can be passed on. The route through inflation expectations is the quieter one and acts on all shares at once, because it ends at interest rates again.

For Europe this chain is particularly unpleasant, because the continent imports most of its energy. The European Central Bank had explicitly justified its rate increase in June with war related price pressure.

The reasoning of the central bank is instructive here, because it explicitly links the oil price to the rate decision. What begins as a commodity price ends as a monetary policy measure and therefore back at the yields that act on share prices.

On Friday the American labour market report, further economic data and a restructuring plan from the vehicle industry were in focus. This calendar fits the pattern too. At the top stands an American data set, and only after it comes an event from a single European industry.

Assessment

Three losing days and a gain on the fourth are not news. What is interesting is what triggered the move.

The Dax did not react to German data but to statements by American central bankers and to the oil price. That describes the situation of European shares fairly precisely. The index measures German companies but mostly follows rate expectations and commodity prices that arise elsewhere.

As long as the oil price stays high, this connection stays too. The relief about a possible rate pause changes little about that.

Frequently asked questions

Why do shares fall when bond yields rise

Rising yields work in two ways. First, bonds become more attractive as an alternative. Second, the present value of future company profits falls when a higher interest rate is assumed. Companies whose profits lie far in the future react particularly sensitively.

Why do the price and the yield of a bond move in opposite directions

Because the interest amount is fixed. If investors demand more return, the price has to fall so that the fixed amount corresponds to a higher yield. That is why rising yields and falling bond prices are the same observation in two formulations.

What supported the Dax on this Thursday

Signals for a possible rate pause in the United States. Two senior central bankers had spoken against an increase any time soon. That ended a three day losing streak that had been triggered by rising bond yields and high oil prices.

This text is not investment advice. It reports verifiable figures and puts them in context.

This analysis is for information only and is not investment advice.