Markets

Halver’s market assessment: Quo vadis, stock markets in the final quarter of the year?

Investors are wondering which influencing factors will dominate the stock markets in the traditionally important fourth quarter. Risks are the trio infernals of the US presidential election, corona development and a dirty divorce between Great Britain and the EU. Opportunities, on the other hand, are provided by government stimulation of the economy and, above all, an unwaveringly lush monetary policy that preserves the investment shortage on the bond market with favorable interest rates.

Presidential uncertainty

The TV duel between President Donald Trump and his Democratic challenger Joe Biden underscores the mud battle for the White House. According to the probabilities determined by RealClearPolitics.com, Biden was able to expand his lead over the US president considerably. It is also ahead in important key states. That does not mean anything for the actual election result. Hillary Clinton was also ahead in polls in 2016.

In the short term, the (US) stock markets prefer the continuation of Trump’s business-friendly policy over Biden’s orientation to increase corporate, capital gains and wealth tax and to regulate the sector. High-tech, of all things, as the decisive share driver since March, would initially be susceptible to Biden’s election victory. However, the Biden warehouse would not really give up the great, even geostrategic, competitive advantage of US digitization. In addition, European equities could benefit from a brighter transatlantic relationship. Biden is looking for closer ties with Europe in order to establish a stronger phalanx towards China in e.g. to form trade issues. Europe’s latent weakness to show itself strong on its own would be healed to a certain extent by others. However, there will be no renaissance of old and deep love. The Pacific region has long since replaced Europe as the most important region for America. After all, that’s where the big competitor sits. Or as US Secretary of State Kissinger once said: “America has no friends, only business interests”.

If the incumbent is re-elected, however, the EU fears that Trump will set monuments to himself that serve his ego, but not Europe.

But despite the prominent role of the President in the USA, he cannot avoid both chambers of parliament when it comes to economic and financial policy decisions. While the Democrats, according to current polls, are likely to retain their majority in the completely newly elected “House”, there is a stalemate for a third newly elected Senate.

It would be fatal if the election result is so unclear that it is not recognized by Republicans and / or Democrats. Last but not least, the increasing number of absentee votes play an important role here, the counting of which will extend well beyond election night. In general, the Trump camp never tires of portraying postal votes as manipulable. That gives Trump ammunition in advance, to challenge an election result that is unfriendly for him, to build legends and simply to remain seated in the White House. If lengthy legal processes still have to clarify the correct end result, as in Florida in 2000, American democracy as a whole is weakened. The division of America would widen and the distinctive domestic political rifts even deeper, which made cooperation between the House of Representatives, Senate and President almost impossible, including on economic aid. And then the US stock market, which has been so robust up to now, would also be damaged and affect the world’s stock markets at the same time.

Second corona wave without general lockdowns like in spring

The second wave of corona infections is dampening the fundamental mood for stocks. In the USA, the infections remain at a high level and in individual euro countries they have even reached a new high.

Again stricter social distancing rules, but also the fear of a hot Corona autumn, which German politicians and virologists have in some cases stoked up, are provoking consumer and investment reluctance. This is already reflected in a renewed contraction in the service sector, which overcompensates for the accelerated growth in industry.

However, many companies have adjusted to problems in their supply chains and increased inventory levels. And the governments will continue to react to rising new infections only with regional, but not macroeconomic restrictions, in order not to turn a recession into a depression that is hardly controllable. In any case, not only the corona-related health risks, but also the collateral damage such as fear of the future, depression, social isolation, domestic violence and drug abuse should be taken into account. In this context, politics must act consistently and repressively against those who favor local shutdowns with self-serving, sometimes anti-social behavior. The Corona rules of the game must be adhered to in the interests of the common good.

The ECB provides a sumptuous buffet for fiscal policy

In general, the monetary policy safety net remains tightly meshed. In addition to expanding its pandemic bond purchases (Pandemic Emergency Purchasing Program), the ECB is also examining the long-term transfer of these to its regular bond purchase program (Public Sector Purchasing Program). The expansion of liquidity in the eurozone, obeying the Corona emergency, is thus becoming a virtue. The deflationary tendency in the eurozone is leading to unrestrained central bank policy anyway. At their year-end meeting in December at the latest, further interest-depressing liquidity offensives can be expected.

British travelers shouldn’t be stopped either

With regard to Brexit, British Prime Minister Johnson is pushing ahead with his plan to overturn the EU exit agreement through internal law. Despite all warnings from the EU, the British House of Commons passed Prime Minister Boris Johnson’s controversial Single Market Act. There is strong opposition to Johnson in the British House of Lords, so that there will be a permanent debate between the House of Lords and the Lower House around the beginning of December until the final law is passed. The deadline for a negotiation result between the British and the EU can hardly be met.

In order not to lose credibility, the EU cannot make any further concessions because of the generosity it has already shown. Last minute compromises are always possible in Europe. However, in view of the increased volatility of the British pound, the financial markets do not rule out a complete failure of the negotiations if the exchange rate to the euro is fundamentally falling. Affected companies have meanwhile factored in the tearing of supply chains and export impairments. And if the stock markets survive Corona, Brexit will not lead to lasting dislocations either.

Market Conditions – Fundamental equity strength with flaws

The liquidity boom remains the mega topic on the stock markets.

US economic data, which have recently been surprisingly less positive, have caused fundamental equity irritation. If you look at Citigroup’s Economic Surprise Index – it measures the deviation of published economic data from previously made analyst assessments – American economic normalization is losing momentum. This increases the pressure on politicians to pass a fifth aid package before the elections, between 1.5 and 2.2 trillion. Could be US dollars. However, the corona infection of US President Trump is causing irritation on the stock market. The extent to which he can conduct official business in the near future will depend on the degree of quarantine and the course of his illness. This could result in delays in the next American aid package. America is not ungovernable. If necessary, the Vice President takes over.

By contrast, the Caixin purchasing managers’ index for industry in China is at its highest level in nine years. The CP is doing everything in terms of economic policy and technology to ensure that growth continues robustly even after the Corona crisis.

China is thus providing impetus for German exporters in particular. According to ifo export expectations, their mood is actually at a two-year high. In the chemical and electrical industries in particular, the German export crisis appears to be over, while even automobile manufacturers are expecting sales growth in the Middle Kingdom again.

Overall, the upward trend in the Ifo business climate – fifth increase in a row – underscores the ongoing recovery of the German economy. 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”.

In this respect, the recovery of economically sensitive German stocks is well supported.

However, this upswing will be painful. The wave of layoffs of skilled workers despite the extension of the short-time allowance until the end of 2021 represents a structural break compared to the financial crisis of 2008/2009. At that time, companies wanted to keep their employees much stronger. Today, however, the structural crisis in German industry, especially in the automotive and supplier industries, coupled with digital competitiveness that is weaker than internationally, is clearly leaving its mark on the brakes. Instead of indulging in old class struggle slogans and ideological tax hike debates that make Germany an exporter of companies and employees, economic and financial policy should make the German location fit for the future. More social benefits are not the goal, but a strong economy that pays state transfers from economic profits. This is called the social market economy. State economy based on the Swedish example of the 1970s leads to the second class. In a global world, the task of the achievement principle is creeping economic death.

Sentiment and chart technique DAX – not to be broken

From a sentimental point of view, the share correction that has taken place in the meantime has not undermined fundamental optimism. Investors cautiously dare to return to the stock markets and use the opportunity to make acquisitions, especially when prices are again cheaper and companies that have so far been relatively unscathed by the Corona crisis. Tech stocks that have made particularly sharp corrections are also gaining more approval from investors in the face of more relaxed valuations.

CNN Money’s Fear & Greed Index, which has fallen back from neutral to “fear” terrain, is also a contra-indicator that signals an end to the equity correction.

In terms of the chart, the first stop lines are on the underside at 12,545 and 12,505 points. If the DAX falls below this, further supports at 12,340 and 12,175 will hold. If the rebound continues, the index will encounter initial resistance at 12,685 and 12,774. This is followed by barriers at 12,900, 12,945 and 13,115 points.

The weekly outlook for week 41 – waiting for more positive hard economic data

In China, the mood in the service industry points to a stable recovery. In the USA, the ISM index for services is comfortably in territory indicating expansion.

In the euro zone, the economic sentiment determined by the financial analysis company Sentix is ​​still positive, albeit without new highs. In Germany, “hard” economic data such as industrial orders, production and exports underscore a recovery dynamic that flattened slightly in August.

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