Markets

Halver’s market assessment: There is no friend of equities more loyal to the Fed than the Fed

Without a doubt, Donald Trump’s bizarre government style offers enough scope for criticism. In economic terms, however, America surprises with clear signs of recovery. To ensure that it stays that way, further trillions of economic stimulus packages are being prepared, which are also due to the US presidential election campaign. To ensure that the American bald eagle does not become a bankruptcy vulture due to the debt orgy, the US Federal Reserve must remain a consistent agent for US fiscal policy.

America, the land of unlimited opportunities? This is still true with economic stimulus!

Negotiations are already underway in the USA on the next stimulus program. The fifth aid package then could be even higher than the previous one. Always looking at the presidential election, the Republicans do not want to be inferior to the Democrats, who are asking for trillions in aid, in terms of the will to save. In view of the great mass unemployment, nobody wants to present themselves as a slowdown. Especially not Trump, who is significantly behind in surveys.

The US Federal Reserve also warns of an “income cliff”, a sudden expiry of the Corona emergency aid programs for the unemployed at the end of July with fatal consequences for the domestic economy. The US retail sector is on an impressive recovery course. But consumer expectations have already clouded over again.

In any case, the second wave of infections and the first US applications for unemployment benefits, which have been rising for the first time since March, provide the right alibi for an extension of social benefits for unemployed people who traditionally choose to be more democratic.

America has little to do with stability issues such as unprecedented record levels of debt. Debt has always been viewed as a highway on which the economy should pick up speed as quickly as possible. This year alone, the United States will increase the national debt accumulated since the state was founded in 1776 by another 20 percent.

A clever trick: simply inflate debt away

In this debt game, the US Federal Reserve must ensure that the overwhelming debt burden remains sustainable. The Fed attaches the greatest importance to negative real yields on US government bonds, i.e. after deducting the price increase. Inflation eats up debt. In this way, America has already got its world war debt under control.

For this purpose, the Fed is also discussing so-called yield curve control. The central bank could signal to interest rate markets that it wants to anchor the yields on 10-year US government bonds at zero percent. This concrete announcement alone would exert significant yield-reducing pressure on the entire yield curve. The motto is “Never fight the Fed!”. Even with low inflation rates, such as currently 0.6 percent, America could borrow in real terms.

In crises, the US Federal Reserve has always been tied to the carts of Washington interests. This “beloved” tradition is consistently continued in the economic recovery.

Market situation – The crash continues to fail

Reports of a dynamic development of new infections in Europe are again fueling fears among investors about a second wave of infections. In any case, persistently high new infections in the USA are causing irritation. Even if Trump commits the population to a worsening situation, there are increasing signs that the high point has gradually been passed.

Figure 1: Daily new infections of the corona virus

In order not to endanger the economic recovery process too much, US politicians only want to contain viral infections regionally. This is one of the reasons why optimism prevails on the US stock exchanges, which have already partially made up for their viral crisis losses this year and even have a positive annual performance, see S&P 500 and Nasdaq Composite. Indeed, real US economic data since May have shown dramatically positive surprises based on analyst estimates made earlier.

Figure 2: Economic Surprise Index USA and US stock market

Declining economic disappointments in the Eurozone – albeit with less dynamism compared to America – also flank the European stock recovery.

Figure 3: Eurozone Economic Surprise Index and Eurozone stock market

It also fits into this picture that in July the mood in the industry and service sector worked its way into expansion territory.

Figure 4: Purchasing manager indices manufacturing and service sector Eurozone

The agreement on the EU reconstruction fund of EUR 750 billion also had a positive impact on equities. The first money will not flow until mid-2021. What is important, however, is the symbolic effect that the EU is able to act despite much smashed political porcelain and that euro sclerosis has been temporarily stopped. Last but not least, this is reflected in an attachment of the euro to the US dollar. The high price, however, is that Europe has become a transfer union. In Brussels, this is called politically correct “fiscal union”. And where stability drops, the price of gold and silver increases.

Against this background, an end to the misery of companies is increasingly being priced in. In Germany, the shrinkage is already noticeably decreasing. The USA and emerging markets have also bottomed out. The eurozone is somewhat more subdued.

Figure 5: Rolling 12-month earnings growth in the US, Eurozone, Germany and emerging markets

The cyclical shares naturally benefit from the economic catch-up effects. In this respect, cyclical German stocks have been able to close the performance gap with the American S&P 500 more and more since the beginning of the year.

In principle, the interest rate emergency remains a serious advantage for shares. The debt relief of the states through monetary policy or inflation is conversely the de-riching of the savers or the domination of the debt crisis is the credit crisis of the interest investors. There are no longer any attractive parking options.

Figure 6: 10-year German and US government bond yields, after inflation

One may denounce the absolutely high valuation of stocks. But in comparison, the valuation of interest papers is no longer out of this world. Incidentally, given the fact that global debt is increasing, interest rate hikes are at best a mirage. Otherwise, the final debt meltdown threatens worldwide.

Basically, there is a struggle on the stock market between this never-ending liberal monetary policy and the still subdued hard data from the economic and infection front. The first party will have the upper hand. The flood of liquidity with its interest-related investment crisis is a killer argument against long dry spells on the stock market. You may think this is hot air. But this hot air has become a fixed reality in the financial markets that can no longer be ignored. The only fundamental view of stocks has had its day.

Sentiment and Charttechnik DAX – caution, but …

According to Bank of America Merrill Lynch’s Fund Manager Survey, institutional investors are quite skeptical about the boom due to fears of a second wave of infections. Also in the Macro Risk Index of Citigroup, the cautious “risk aversion” dominates with a value of 0.55. Values ​​greater than 0.5 signal increasing risk aversion, values ​​less than 0.5 risk taking.

Figure 7: Macro Risk Index and World Equity Index

After all, almost three quarters of fund managers expect the global economy to pick up. When it comes to stock selection, US stocks, healthcare and technology stocks are ahead.

The CNN Business Fear & Greed Index has recently moved from the “neutral” area to “greed”. This development can also be seen as a counter signal, which favors volatility and harbors the risk of temporary setbacks on the stock markets.

Figure 8: CNN Money’s Fear & Greed Index

The approaching final phase of the US presidential campaign, in which Trump will pull out all the stops, also speaks for more fluctuations in price for the time being. The current diplomatic tensions between Washington and Beijing are an example of this. However, apart from the electoral frenzy, it seems that the transpacific trade conflict has actually started to flare up so far.

Dramatic stock slumps are not expected. This is also due to the fact that the cash holdings of the large capital collecting points are above average. So there is enough investment ammunition to take advantage of attractive entry opportunities with course reseters. Last but not least, asset managers have had to realize since mid-March that abstinence from shares is too long.

In terms of charts, the first supports are at 12,913 and 12,812 points on the bottom. If the limit is undershot, the next stop lines are at 12,773 and 12,536. On the way up, the DAX encounters initial resistance at 13,147 and 13,224. Above that, there are barriers of 13,314 and finally 13,500 points.

The weekly outlook for week 31 – The Fed continues to play the merciful Samaritan

In China, the economic recovery continues according to the official Chinese purchasing manager index for manufacturing. In contrast, weak recovery tendencies can be observed in Japan according to industrial production and retail sales.

In the United States, preliminary GDP figures for the second quarter underscore the devastating economic downturn. However, the Chicago area purchasing managers’ index, along with solid durable goods orders, signals that the US economy has the worst behind it. And consumer confidence published by the University of Michigan continues to stabilize. At its meeting, the Fed will clearly emphasize that it will continue to support the US economic recovery massively.

According to preliminary GDP figures for the second quarter, the economic downturn in the euro zone is dramatic. According to the initial estimate, the inflation trend in July remains subdued.

According to the Ifo Business Climate Figures, the economic recovery in Germany is steadfast. Retail sales are also starting to pick up again.

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