Markets

Halver’s market assessment: Too much optimism in the stock market? – columns

Despite lockdown extensions, virus mutations and setbacks in the vaccination process, there is clear economic and equity optimism. If US government bond yields rise again at the same time, there is definitely potential for temporary stock setbacks and increased price fluctuations. Fundamentally, however, financial policy will be able to rely on continued help from monetary policy in its further debt-financed economic stimulus programs.

Virus development ensures W-shaped economic recovery

The sensitive global infection situation is initially holding back the global economy due to renewed lockdowns. Using mobile data from the Google COVID-19 Community Mobility Reports, the “Corona Relaxation Index” provides movement trends in retail, supermarkets, pharmacies and at work, which can be used to identify the economic consequences of the containment or relaxation measures, depending on the country. In the major European economies, a temporary slowdown due to lockdown extensions is inevitable. And in the US, too, there is still a long way to go before the pre-crisis levels.

In fact, the vaccinations have so far been slow and the technical vaccination procedure has left a lot to be desired in terms of thoroughness. Nevertheless, a renewed paralysis as from March 2020 is not to be expected. Further vaccine approvals and ramping up production capacities are increasingly fueling the hope of herd immunity in the second half of 2021. Then significant catch-up effects in investments and consumer spending will take hold and suggest a W-shaped economic development. Further economic stimulus programs, for example by the federal government in the super election year 2021 and in Italy, which is planning investments of around 223 billion euros, will give the economy a helping hand. Overall, the economic expectations for the next six months determined by the investment consulting firm Sentix are brightening massively across all regions of the world. The front runners are the emerging markets of Asia, with a focus on China.

Biden goes big

In the US, the Democrats will have a majority in all government-relevant institutions in the future, so that after Joe Biden officially took office on January 20, further massive corona aid for the US economy of more than 1.9 trillion US dollars can be expected . Specifically, Biden is planning an “American rescue plan” with a clear focus on stabilizing consumption. In view of the weakening US labor market recovery – in December there were job cuts for the first time since the Corona peak in April – in addition to an increase in the already decided money transfers from 600 to up to 2,000 US dollars for those eligible, an increase and extension of unemployment benefits of Expect $ 300 to $ 400 per week from March to September 2021.

Extensive infrastructure investments in climate and environmental protection will be added later and have an additional economic effect.

The oil price, which is supported by the agreement between OPEC + (with Russia) on lower oil production volumes, has a brilliant start to the year up to the end of March and thus favors rising inflation expectations, is also documenting increasing economic optimism.

As a particularly cyclical industrial metal, copper is also continuing to benefit from the expected global economic recovery, while gold is currently less popular due to the calming geopolitical and trade policy risks. Historically, a significant increase in the ratio of copper to gold has regularly been a reliable early indicator of a clear rise in yields on US government bonds. In fact, yields have already recovered from their lows at the end of July and are now back at pre-coronal levels.

The monetary policy point of no return has long been reached

Is there really a risk that interest rate rises will reach a level that will rob the stock markets of their longstanding argument that there is no alternative? No, because the central banks know that without their interest-suppressing function, the financial world could face the ultimate debt crisis in extreme cases. Theoretical monetary policy simulation games that are supposed to document stability orientation cannot stand against the force of the factual. US Fed chairman Powell recently stressed that the ultra-loose monetary policy would continue for a long time. A departure is not to be thought of before the work is “well and really” done. Even with an upturn in the second half of the year, there is still “a long way to go” until then. In any case, the Fed does not see any major inflation risks.

In any case, the Fed has a critical eye on the appreciation of the dollar, which, if it continued, would damage the export economy and thus the American economic recovery.

At the ECB, board member Isabel Schnabel recently made it clear that short-term increases in inflation will have no impact on the permissive monetary policy. For representatives of the ECB, this is a clear signal from the fence post. Last but not least, the ECB should finance the green restructuring of the economy.

In terms of interest rates, the euro zone has already decoupled from the USA. The return on German government bonds does not follow the American trend – contrary to a historically typical long-term parallelism.

Overall, the equity markets have not lost their most important argument, the liquidity boom.

Market situation – In the meantime, a harsher equity climate possible

After the DAX had climbed to 14,000 points, had reached all-time highs in the USA and prices in Asia were also very robust, the stock markets first paused for thought. Because while German politicians are already suggesting an extension of the lockdown until Easter due to virus mutations, renewed virus outbreaks in China are causing irritation.

So far, however, there has been no real panic in the stock markets. Beijing responded immediately with radical measures such as extensive foreclosures and quarantines. China’s economic recovery, which should be reflected in the robust GDP figures next week, should not suffer any lasting damage.

In addition, the tightening of the lockdown is offset by further financial and monetary policy support if necessary. The Bank of Japan has long shown readiness for further clear easing. And on the occasion of its meeting next week, the ECB will emphasize that it will remain luscious in the future. This is supported not least by the persistent euro-political risks, as the fragile government in Italy shows. In principle, the ECB is also involved in order to hold Europe together politically.

Positive impulses can also be expected from the US reporting season for the final quarter of 2020. According to Zacks Investment Research, declines in profits in the energy, transportation and consumer sectors are offset by positive developments in the construction, automotive and basic materials sectors. The focus is in particular on the outlook for 2021, which should point to the economic improvement in the second half of the year.

This is increasingly moving industrial stocks into the focus of investors. In this context, the normalization of sales of construction machinery manufacturer Caterpillar as a typical global economic share is gradually advancing.

In Europe, too, stocks from industry and chemicals are doing well.

Last but not least, Germany, which is particularly cyclical and export-oriented, benefits from this improved fundamental situation. This means that Germany has a good chance of ending its underperformance compared to America.

Overall, the end of the earnings recession has heralded. Analyst earnings revisions for the world equity market are indeed continuing to rebound, following robust industrial sentiment. The purchasing managers’ indices for industry and services in the euro zone and the USA should confirm this generally stabilizing picture.

Sentiment and chart technique DAX – breather in the upward trend

From a sentiment perspective, the proportion of optimists in the US stock market minus the proportion of pessimists is above the first standard deviation. As a counter-indicator, it signals an increasing risk of consolidation through profit-taking. The German stock market, which is already pricing in a lot of positive things after reaching its all-time high, would not escape this effect.

Setbacks should be used by investors to increase their positions, especially in the cyclical area. In the global competition for returns for investors, alternative opportunities in the interest rate area are few and far between. The investment crisis remains high. This is why the investment rate among US fund managers remains high.

In terms of the chart, the DAX encounters initial resistance if it continues to stabilize at the 14,000 point mark. If overcome, the next barriers follow at 14,030 and 14,135. If it comes to profit-taking, the DAX encounters an initial support at 13,878. Further stop lines follow at 13,814, 13,622, 13,795, 13,735 and 13,552 points.

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