The DAX, or DAX30, is an equities index that includes the top 30 German companies traded on the Frankfurt Stock Exchange. It is a weighted index, meaning that larger companies have a greater bearing on its valuation. The DAX is traded on CFD markets and exhibits higher volatility than the S&P 500. Foreign trade, Euro valuations, and company performance are key determinants of pricing.

The DAX index makes up around 80% of the total market capitalization of German public corporations, making it an important benchmark for domestic and European performance.

Some of the top names in the index include:

Each company on the DAX is examined quarterly and is added or removed based on its market cap and the size of its order book. If a company falls below the top 45 companies in Germany, it will be removed. Similarly, a company that breaks into the top 25 companies can be added to the index.

What Determines the DAX’s value?

Ultimately, the DAX’s value is determined by the performance of its 30 companies. It’s capitalization-weighted, meaning that larger companies will have a more significant impact on the DAX’s price. To be a part of the index, a company needs to have been listed for three years and must trade at least 15% of its market cap publicly.

At the end of each day, the closing price of each company’s stock is taken into account with a formula that calculates the overall price of the DAX using its specific capitalization-weighted requirements. This formula gives the closing price of the DAX for each day.

Like many financial instruments, the DAX is largely moved by sentiment and economic/political factors that affect individual share prices, driving the DAX up or down.

DAX Price Factors

As the DAX simply moves based on its underlying stock’s prices, its price factors can be understood by looking at what drives stocks up or down. At its core, like any financial instrument, stock prices are determined by supply and demand. But factors that determine this supply and demand include:

Sentiment

The overall sentiment of the market has a big impact on the DAX and other equities, as investors generally refrain from buying if they’re scared of further losses and vice versa. This lack of demand often can’t outweigh the supply coming into the market and will cause a stock’s price to fall, impacting its overall equity market.

Earnings

As there is often uncertainty about how a company will perform in a given quarter, earnings releases can cause explosive movements in stock prices. Generally speaking, if a company performs better than expected, its stock price will rise. If this happens on a grander scale in Germany’s top 30 companies, the DAX will probably climb.

Economic Events

Economic events, like employment data, inflation figures and industrial output, cause shifts in sentiment. For example, if news came out that Germany’s GDP had fallen, it’s likely that stock prices would fall as investors sell their stocks for fear of (potentially further) losses. As this would likely happen across each stock, the DAX would also fall.

Inflation

Inflation and the stock markets hold a pretty complicated relationship. Generally, companies with higher input costs (the costs it incurs to make its revenue-producing product) and low pricing power (the ability or inability to raise prices without losing customers) will fare poorly with inflation. For example, a drug manufacturer, like Bayer, might do well even if inflation is high, as people still need medicine; they have decent pricing power. Meanwhile, a company like Volkswagen has high input costs and relatively low pricing power, meaning it will likely perform poorly.

The relationship is much more complex than we could fit in this explanation, but generally speaking, higher inflation is correlated with lower equity market returns.

Interest Rates

One consequence of inflation is that central banks tend to hike interest rates as a result to calm spending and slow inflation. Higher interest rates cause lower spending; lower spending usually means less corporate profits, particularly as loans become more expensive.

As high interest rates make a currency more valuable, global investors might put their native currency into a higher-yielding one. If the Euro has higher rates than Japan, Japanese investors will buy up the Euro to take advantage of these higher rates (known as a carry trade).

A stronger currency means that exports are more expensive, and in a manufacturing-centric economy like Germany, it’s likely that its overall level of exports will drop. This ultimately hurts companies in the DAX and causes their stock and the DAX’s price to fall.

DAX Recent Events

Coronavirus

As Covid began to spread in Germany and other countries, indexes like the DAX fell rapidly. Fears of lockdowns and overall uncertainty led to a dramatic drop in the DAX’s price, falling from an all-time high of 13788 to a low of 8255 in the following weeks, a nearly 40% drop. In the bull market of 2021, however, prices surged past the previous high and peaked at 16202.

Inflation

As inflation and recession fears have gripped global markets, the DAX has fallen considerably, in line with U.S. equities. Prices are back below 2020’s pre-Covid peak, and the bear market looks set to continue. As of August 2022, inflation seems to have peaked at 7.9% in May 2022.

Interest Rate Hikes by ECB

Because of inflation picking up, the European Central Bank has been forced to raise interest rates to levels not seen in nearly a decade. As described, this hurts share prices, and its effects have been felt across the German economy since the rises were first announced.

EUR/USD is an attractive pair to trade. As the most liquid currency pair in the forex universe, spreads are often razor-thin and perfect for short-term scalp trades. Its depth, liquidity, and overall popularity make it a favorite of central banks, commercial banks, institutional traders, and retail traders alike. While large banks often use the pair as a hedge, retail traders favor EUR/USD as both a bellwether for the dollar and for its low-cost to trade and hold.

DAX Specifications

The DAX is traded in amounts denominated in Euros.

Standard lot Size: 25 * DAX price level

Mini lot size: 5 * DAX price level

Micro lot size: 1 * DAX price level

One pip in decimals 0.01, 0.05 or 0.25 depending on contract size

Pip Value: €1, €5, or €25 (varies with exchange rate)

Formula:

Profit/Loss = (Bid Price – Ask Price) X Contract Size X Number of Lots / Closing Price