Markets

Halver’s market assessment: fiscal and monetary policy or “Nobody can separate good friends”

It looks like endless government aid. In order not to jeopardize the momentum of the economic recovery, fiscal aid is being generously extended and even expanded. The inevitable rise in new debt can now only be countered with a lavish monetary policy. The stock markets can evidently live well with this forced friendship.

German economic sentiment is “booming”

After the fourth increase in a row, the Ifo Business Climate is on a clear upward trend. Even if the Ifo business situation is still well below the pre-crisis level, the particularly optimistic Ifo business expectations have completely offset the Corona slump. They are even at their highest level since November 2018.

Figure 1: Ifo business climate, situation and expectations

According to the Ifo economic matrix, which relates the business situation and expectations according to the four phases of an economic cycle, the German economy has left the recession behind and is working its way into the economic cycle phase “boom”.

Figure 2: Ifo business cycle matrix

Economic follow-up impulses come from the further stabilization of German foreign trade partners in Asia and the USA. In this respect, the mood among German exporters is also continuing to be robust, according to ifo export expectations. In the mechanical engineering and electrical industries in particular, the export crisis appears to be over.

Figure 3: Manufacturing purchasing managers’ index in the USA and ifo export expectations

There is always a crisis – when the state economy becomes the new normal

Unprecedentedly generous rescue packages for companies and social transfer benefits such as, for example, provide for a V-shaped economic recovery. the short-time work allowance in Germany, which is now extended until the end of 2021. The state has an obligation to intervene so that a recession does not turn into a depression. This attitude must first be understood, especially in terms of social policy. Why shouldn’t a temporary economic crisis, for which the participants are not responsible, be bridged in order to prevent worse things from happening?

But if companies assume that they will be kept alive by the state, their efforts to remain competitive and innovative will diminish in case of doubt. This is especially true for companies that were unable to survive even before the crisis and for which the insolvency obligation is exposed. But if productivity falls, sooner or later this will lead to wage cuts, precarious employment and the dismantling of state welfare. And when the basis for future prosperity falls away, social peace is at stake.

The friendly support of the EU with gifts causes similar collateral damage. One may bring calm to the European box for the time being, but in the longer term the suppression of the performance principle will increase the economic problems, especially since the US and Chinese competition do not do one thing: sleep.

In general, the longer the state interferes, the more the patriotic fully comprehensive insurance becomes the new and pleasant normal. There is always a crisis. And so, even after overcoming the Corona crisis, it is becoming increasingly difficult to return to the old normal. If the market economy is used instead of the state economy, the voters’ vengeance could be terrible. A politician who is always homo oeconomicus will certainly take this into account.

Monetary policy is also politics

How monetary policy will navigate through the debt decade ahead is the main topic at this year’s Jackson Hole virtual central banker symposium. Because in the debt carousel accelerated unrestrainedly by the Corona crisis – in 2020 the national debt that has accumulated since the state was founded in 1776 in the USA will increase by another 20 percent – the central banks must ensure that the dramatic budget deficits are covered at low interest rates.

Monetary policy has been tied up in front of the financial policy cart since the financial crisis of 2008. And now at the latest, the central banks are writing down their generosity. A smooth realignment of the inflation targets serves as an alibi.

As part of its strategy review, the Fed decided to tolerate an overshooting of the price increase by more than two percent in order to sustainably consolidate inflation expectations or to avert the risk of deflation. Two percent is therefore just an average target that allows, after a long phase of inflation that is too low, to allow a long phase of higher inflation. In fact, US inflation averaged just 1.7 percent over the past ten years. “Honi soit qui mal y pense”: While maintaining credibility, the Fed has created a rubber paragraph for itself with which it can ignore future price increases intended to ensure debt sustainability and to stabilize the economy and employment.

Chart 4: US Federal Reserve Rate and US Inflation Rate

The Fed is paving the way for negative real returns on US Treasuries. After subtracting the price increase, America can in real terms excuse itself.

This realignment of the US inflation target will also serve as a blueprint for the ECB for its ongoing strategy review. It has not been able to achieve its inflation target since 2003 either. But it still has to give the Roman Debt Union fire protection for a long time to come.

Market situation – a little trade peace and hope for corona therapies

In this respect, there is little to be said in favor of restrictive monetary policy in the future, but much in favor of equities.

Figure 5: Central bank money supply and world stock market

In Japan, the surprising resignation of Prime Minister Shinzo Abe initially put a damper on the mood of the stock. However, concerns that the debt-financed economic stimulus with massive support from the Japanese central bank – the so-called Abenomics – will come to an abrupt end are inappropriate. In view of the problems of the Japanese economy, no head of government can avoid intensive state economic stimulation.

The worsening virus situation in Europe cannot really shock the stock markets. Because politics will not initiate a general lockdown. The trend towards decreasing corona cases in the USA is positive and is raising hopes of a continuation of the recently interrupted easing measures and thus further economic momentum.

Figure 6: Daily new corona infections

In this context, advances in corona therapy also brighten the stock prospects. The US government wants to speed up the approval process for the promising vaccine candidate from AstraZeneca.

Encouraging signals are coming from the trans-Pacific trade front after the US and China resumed talks on the existing trade deal. And also in the US trade conflict with the EU, the signs point to relaxation again.

Overall, an end to the existing misery of profits for particularly economically sensitive German companies is increasingly being priced in.

Figure 7: Ifo business expectations and earnings growth in the DAX

This development is also evident globally. In Europe, at least the negative earnings trend is stabilizing.

Chart 8: Corporate earnings worldwide

This increases the fundamental support for stocks.

Chart 9: Earnings and share price development on the world stock market

Sentiment and chart technique DAX – more than just robust

From a sentiment perspective, equity investors are relaxed: The Market Risk Indicator from Bank of America Merrill Lynch measures expectations on the futures market with regard to price fluctuations on the global equity, currency and commodity markets. For values ​​above zero, it indicates increasing market risks and for values ​​below that, it indicates risk relaxation. After the value was around three at the height of the Corona crisis, it has currently dropped significantly to just below zero.

Chart 10: Bank of America Merrill Lynch Market Risk Indicator and World Stock Market

In terms of the chart, the recovery will continue when the DAX closes above the barrier at 13,222 points. Further resistances follow at 13,314 and 13,433. In addition, the DAX is targeting the level at 13,477. If this barrier is also exceeded, the next ones are 13,515 and 13,600. However, if the index turns well below the supports at 13.175 and 13.160, there is a risk of further price losses up to the hold lines at 13.100, 13.093 and 13.010. Below that, the brand stops at 12,836 points.

The weekly outlook for week 36 – waiting for positive hard economic data

In China, the economic recovery continues, as can be seen from the official purchasing managers’ index for the manufacturing sector and the counterparts for industry and services determined by the Caixin media group. In Japan, a stabilized industrial mood is accompanied by improved production and rising retail sales.

According to the ISM indices for the manufacturing and service industries, the economic sentiment in the USA remains at its current high level. The increase in industrial orders is less dynamic. The US labor market recovery continues its lethargic recovery.

According to the initial estimate for August, inflation in the eurozone will continue to be weak.

In Germany, “hard” economic data such as industrial orders and retail sales signal a slightly flattening recovery dynamic.

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