Halver’s market assessment: The ECB cavalry is still holding back, but the horses are saddled

At its most recent meeting, the ECB initially refrained from any further offensive to stimulate the economy. But with a view to their cautious prognoses, the deployment order is already in the drawer. The US Federal Reserve also plays an important role in the process of promoting exports in the war of currency devaluation.

Downside inflationary risks

The slight increase in the eurozone growth forecasts of the ECB in 2020 (minus 8 after minus 8.7 percent) is purely cosmetic in nature and is primarily due to basic fiscal effects. The same applies to the even less euphoric brightening growth prospects for 2021 (5.0 after 5.2 percent) and 2022 (3.2 after 3.3 percent) after the epochal slump. Anyway, ECB boss Lagarde sees further downside risks. Because despite the initially positive performance in industry, the mood in the much larger service sector is noticeably flattening out. Increasing numbers of infections lead to consumer reluctance and irritate companies close to consumers. A no deal Brexit also poses a risk.

Figure 1: Purchasing manager indices in the service sector of individual euro countries

It is definitely not a sign of reluctance that the ECB will initially neither increase the volume nor the duration of its bond purchases. In principle, a major central bank must always signal that it makes autonomous and independent decisions and not markets and fiscal policy.

However, the ECB leaves no doubt that if the economic recovery continues to stutter – as expected – it will expand its liquidity offensive by December at the latest.

For the time being, the ECB’s current purchase programs offer enough legroom to continue purchasing bonds at the current pace. The purchases under the “Public Sector Purchase Program” (PSPP) and the emergency program “Pandemic Emergency Purchase Program” (PEPP) will total 350 billion euros by the end of the year. The ECB alone is absorbing the entire supply of new government bonds in the euro zone like a sponge. Yield increases, even at the expense of financial policy, are not to be expected.

The worst enemy of the ECB is not inflation, but deflation

In principle, central banks can arm themselves well against inflation. Deflation, on the other hand, is a particularly dangerous virus. Once it has infected an economy, it is difficult to stop the decline, see Japan. This is especially true in the currently uncertain Corona period, but basically also due to global competition and digitization that significantly increases productivity. Preventive fight against deflation is the order of the day.

The euro is too expensive for the ECB

And so a firm euro makes inflation more difficult. The more it appreciates against the US dollar, the lower the pressure to increase prices for commodities quoted in US dollars. The already faltering recovery in raw material prices will be further dampened on a euro basis.

Chart 2: Commodities, in euros and US dollars

Overall, the brief upward trend in inflation expectations is reversing. And with an inflation rate in August at a four-year low of minus 0.2 percent – albeit with special effects from VAT cuts – and core inflation at an all-time low, the ECB will keep key interest rates at their current or a lower level until a constant convergence of price increases with their official inflation target of two percent. In view of their cautious inflation projections for 2020 of unchanged 0.3; In 2021 1.0 instead of 0.8 and unchanged at 1.3 percent in 2022, this cannot be the case before 2023.

Chart 3: (Core) inflation rate and inflation expectations in the euro zone

Last but not least, the recent steady appreciation of the euro as a negative factor for exports is a thorn in the side of the ECB. Lagarde does not mention a specific pain threshold for the euro. In terms of currency manipulation, she does not want to make herself vulnerable. Nonetheless, the currency markets have understood that the ECB is entering into the cold war of devaluation with the Fed.

But as much as the strength of the euro may serve as an ad hoc alibi for continued monetary policy freedom, there is little to be said in the long term for a brilliant euro strength. The basic economic effects and a Euro-political calm are not sustainable arguments against the hegemon America and its currency. Indeed, the upward trend of the euro against important trading currencies such as the US dollar, Japanese yen and Chinese renminbi is currently weakening.

In any case, the trend of America’s declining yield advantage over Germany, which has persisted since 2019, is coming to an end, which points to an end to the euro appreciation against the US dollar.

Figure 4: Interest rate difference for 10-year government bonds Germany minus the USA and the euro / US dollar exchange rate

Central banks and the state economy have merged

In the short term, as a result e.g. an intermediate economic base effect, reaching or exceeding two percent is quite possible. In order not to endanger the economic recovery, the stability of the labor markets and its own credibility with monetary policy restrictions, the ECB is currently reviewing its (inflation) strategy. When the results are announced in the second half of 2021, like the Fed, it is likely to announce an average inflation target of two percent. This means that after a long phase of too low inflation – the euro zone inflation rate averaged only 1.3 percent over the last 10 years – a long phase with higher than two is also permitted. This regulation is deliberately made rubbery and without a specific time setting. This means that any restrictive ECB policy has been postponed for an indefinite period of time. Debt sustainability is assured.

Above all, nothing stands in the way of the sustainable financing of the most lavish state economic stimulus programs. Who wants to risk a new euro crisis and social unrest? And if the ECB has not died, it will continue to finance tomorrow. One wonders how the ECB will ever escape this gluttony again.

Market situation – liquidity boom remains the bread and butter business for stocks

The most exuberant monetary policy of all time remains the tightly knit safety net for stocks.

But the fundamental stock picture is also strengthening. The economic expectations for the next six months determined by the investment consulting firm Sentix are continuing to stabilize. Germany and the emerging countries of Asia – the highest since February 2013 – are certified to have the best economic prospects. The US economy is also catching up. The Atlanta Fed now estimates US growth in the III. Quarterly projected over the year to a good 30 percent. Here too, the base effects strike.

Chart 5: Sentix SentiMent economic expectations for the next 6 months

Incidentally, no global economic double dip with fundamental collateral damage on the stock markets can be derived from the weak oil price. On the raw material markets there are rather fears of an end to the production cuts by OPEC and its allies (OPEC +), which in view of the economic downturn are urgently dependent on oil revenues, regardless of the price.

Equity investors are even less worried about Trump’s regular swipes at the Chinese, whom he threatens to drastically reduce economic ties if they are re-elected. They know that Trump is lagging behind in polls and is shooting out of all tubes. In general, even with Trump, nothing is eaten as it was cooked.

And yet one keeps in the back of the head in the (European) stock markets that Trump no longer has to consider re-election in a second term and could be inclined to set “America First monuments” that cause pain for export-oriented countries and regions .

Sentiment and chart technique DAX – Fomo (Fear of missing out)

At the sentiment level, the assessment of stable stock markets is expressed in a generally high investment rate among US fund managers. In any case, they are afraid that course corrections will only be temporary, not longer-term. With fierce competition among asset managers, one cannot afford to be absent from rallies. And so institutional investors use the short-term share setbacks as a buying opportunity, especially for cyclical and economically sensitive shares that are still comparatively cheap. German and Japanese stocks in particular benefit from this, while investors cash in on US tech stocks with high book profits.

On the one hand, high valuations and, on the other hand, intact business models speak for higher volatility in the future. This will also be contagious worldwide.

Figure 6: Price fluctuations on the German stock market

In terms of the chart, the first resistance is on the way up at 13,250 and 13,222 points. Further barriers follow at 13,313, 13,460 and 13,500. If the DAX can break the levels at 13,600, the recovery will continue to 13,623 and 13,800. On the downside, the first supports are at 13,150 and 12,950. Below that, the brands hold at 12,770 and 12,750 points.

The weekly outlook for week 38 – stocks will never have a better friend than the Fed

In China, improvements in industrial production and retail sales confirm the continuing economic recovery. The Bank of Japan is maintaining its ultra-loose monetary policy in view of the ongoing slowdown in inflation in August.

In the US, the real estate sector continues to recover on the basis of stable housing starts and permits. The slowdown in industrial production and retail sales is accompanied by a weakened Philadelphia Fed purchasing managers’ index. Consumer confidence at the University of Michigan also remains sluggish. The US Federal Reserve will use this mixed situation at its meeting to reaffirm its looser monetary policy for a long time to come.

In the eurozone, the final inflation figures confirm persistent disinflationary pressures. In Germany, the ZEW economic expectations point to stable economic development.

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