On Tuesday, May 6, 2025, European markets faced a turbulent trading session, primarily influenced by the latest developments in U.S. trade policies and a surprising setback in German politics. The DAX, Germany's leading stock index, opened the day with a slight gain of 0.17%, reaching 23,384. However, this optimism quickly faded as uncertainty surrounding the Federal Reserve's monetary policy and the fallout from U.S. President Donald Trump's proposed tariffs began to weigh on investor sentiment.
Trump's announcement on May 5 of a 100% tariff on foreign-made films ignited fears of escalating trade tensions, which had already been a concern for markets globally. Despite this, there was a glimmer of hope as optimism regarding a U.S.-China trade deal had initially boosted risk sentiment during the Asian trading session, spilling over into European markets.
As the trading day progressed, the DAX's trajectory was heavily influenced by corporate earnings reports. Major companies such as MTU Aero, Continental AG, and Fresenius Medical Care released their earnings on the same day. Continental AG saw a robust increase of 2.77%, while Fresenius Medical Care gained 2.09% after exceeding profit estimates. In stark contrast, MTU Aero experienced a decline of 3.06%, citing potential negative impacts from the proposed U.S. tariffs on the aviation sector.
Meanwhile, the auto sector also showed resilience, with BMW and Porsche shares climbing by 0.59% and 0.52%, respectively. Other automakers like Mercedes-Benz Group and Volkswagen also reported positive movements, reflecting a sector-wide optimism despite the overarching tariff concerns.
In the U.S., equity markets had a rough day on May 5, with the Dow Jones Industrial Average and the S&P 500 falling by 0.24% and 0.64%, respectively, snapping a nine-day winning streak. The Nasdaq Composite Index also dropped by 0.74%, driven down by a slump in technology stocks as investors reacted to the implications of Trump's tariff proposal.
Market analysts noted that the ISM Services PMI, which increased from 50.8 in March to 51.6 in April, added to the complexity of the situation. This rise indicated a pickup in price pressures, raising concerns about inflation and potentially diminishing expectations for a Federal Reserve rate cut in the first half of 2025. As inflationary pressures mount, the Fed may be less inclined to lower interest rates, which could lead to higher borrowing costs and impact corporate earnings negatively.
Looking ahead, the focus will be on the upcoming U.S. trade data, expected to show a widening trade deficit from $122.78 billion in February to $129 billion in March. A higher deficit could reignite Trump’s tariff threats, while a lower reading might ease concerns and boost demand for risk assets like German stocks.
In a broader context, the DAX’s near-term performance hinges on economic indicators, trade developments, and central bank guidance. Currently, the DAX trades above both the 50-day and 200-day Exponential Moving Averages (EMA), maintaining a bullish bias. A breakout above the previous high of 23,476 could set the stage for a climb towards 23,750, with the psychological level of 24,000 in sight if momentum continues.
However, if the index falls below 23,000, it could trigger a decline towards 22,750, with further support at 22,500. The 14-day Relative Strength Index (RSI) at 67.04 suggests that the DAX might approach 23,500 before hitting overbought territory.
As the day unfolded, political developments in Germany added another layer of complexity to market dynamics. Conservative leader Friedrich Merz faced a significant setback in the chancellor election, failing to secure the necessary majority during a secret ballot. Merz received only 310 votes out of 621, falling short of the required 316. This unexpected turn of events sent the DAX into negative territory shortly after the market opened, with the index ultimately slipping 1.1% to 23,084 points.
Merz's defeat raised concerns among investors, particularly regarding his proposed investment plans for defense and infrastructure, which had been seen as a potential catalyst for the DAX's return to record levels. The EuroStoxx 50 also reflected this uncertainty, slipping by 0.7% as markets digested the implications of the political landscape.
In the wake of Merz's loss, shares in the defense sector experienced a downturn, with Rheinmetall falling 2.4% after reaching record levels, and Renk and Hensoldt slumping by up to 3.1% in the MDAX. This reaction underscores the sensitivity of the markets to political developments, especially when they intersect with broader economic concerns.
Despite the day's challenges, certain companies managed to shine. Hugo Boss shares soared nearly 7% following a revenue beat, while Fresenius Medical Care rose over 4% after reporting Q1 results that exceeded market expectations. Continental AG also added 2.4% after announcing its highest sales in four years, indicating that not all sectors were equally affected by the prevailing uncertainty.
As the trading day concluded, the divergence between European and U.S. markets became increasingly apparent. While European stocks, particularly the DAX, faced challenges, they also showed resilience in select sectors. The euro, meanwhile, retreated to 1.13 against the dollar, reflecting a broader pullback after earlier gains. This trend may signal a potential shift in market sentiment as investors await further developments in trade negotiations and central bank guidance.
With volatility likely to persist in the coming days, traders are advised to remain vigilant, monitoring trade headlines and economic indicators that could influence market trends. The interplay between U.S.-EU and U.S.-China trade negotiations will remain a focal point, shaping investor sentiment as they navigate a fluid macroeconomic landscape.
