The falling interest rate expectations were also a key driver of the recent rally. However, these do not go together with a strong economy.
(Photo: dpa)
Dusseldorf The German stock market is currently looking for a direction. With the leading index Dax, the high for the year at 15,659 points has established itself as resistance on the upper side, while the area around 15,250 points offers support on the lower side. The Frankfurt stock exchange barometer is currently moving sideways between these two marks.
This indecisiveness is also reflected in the current Handelsblatt survey Dax-Sentiment among almost 8000 private investors. “Investors don’t really know how to classify the current data,” sums up sentiment expert Stephan Heibel, who evaluates the weekly survey for the Handelsblatt and adds his own indicators.
The economic situation suggests that prices will continue to rise. The managing director of the analysis company AnimusX summarizes: “The labor market is surprisingly robust, company results are mostly positive and the company forecasts for the year 2023 are also surprisingly positive – even taking into account the current great uncertainties”.
The falling interest rate expectations were also a key driver of the recent rally. However, these do not go together with a strong economy.
Heibel, who also writes a market letter called Heibel-Ticker, explains: “If the economy is too strong, the central banks will inevitably raise further interest rates. Central banks want to nip the inflationary tendencies in the bud and are counting on an economic downturn. If the economy still does not weaken, further interest rate hikes are likely to follow.”
Money market could compete with equities
That would be a burden for the stock market, adds analyst Jochen Stanzl from the online broker CMC Markets: “If inflation continues to prove to be so stubborn, the key interest rates in the USA will probably have to be raised by more than 5.5 percent in order to actually fight them can. This would make the money market more attractive relative to stocks and the scales could tip at the expense of the stock market, which was already doing very well.”
This skepticism is also reflected in the results of the Handelsblatt survey. The mood among those surveyed, investor sentiment, has fallen for the second week in a row and is now at 1.4. The proportion of those who see the Dax on an upward trend has fallen by 16 percentage points to 43 percent.
Two weeks ago, investor sentiment was still a good 4.5. “After the rally at the beginning of the year, the current sideways movement somehow almost feels bad,” says Heibel.
This also keeps self-satisfaction at a low level of 0.9. Values below zero signal uncertainty among investors, explains Heibel. “It’s not that far yet, but complacent investors see things differently.”
In contrast, future expectations rose slightly to 0.2 after having been in negative territory for the two previous weeks. Heibel attributes this to the strong quarterly figures presented last week by the carmaker Mercedes-Benz, the insurer Allianz and the aircraft manufacturer Airbus. All three are among the ten largest stocks in the Dax in terms of market capitalization.
As a result, the willingness to invest has increased slightly to 1.1. The group of potential buyers has grown by one percentage point, while the group of sellers has shrunk by four percentage points. However, the willingness to invest is a long way from previous interim highs of over two, three or even four.
The fundamentally prevailing skepticism is also reflected in the protection of private investors. Although the Euwax sentiment of the Stuttgart Stock Exchange shows a decreasing tendency to hedge, after record values of minus 18 percent at the beginning of February, the indicator is still minus eight percent. Private investors therefore buy more put options, which increase in value when prices fall, than call options, with which they benefit from higher prices.
Institutional investors, on the other hand, who hedge via the European derivatives exchange Eurex, have a put-call ratio of 4.6 percent, which signals a large surplus of put protection purchases. “It appears that private investors took early protection via Euwax, while institutional investors are now catching up,” says Heibel.
If the sideways movement on the German stock market does not resolve downwards in the near future, contrary to investors’ expectations, this constellation could lead to rising prices.
Because hedging with put options works practically like short selling. Put simply, this means that if an investor buys a put product on the Dax, the bank has to sell the Dax in the background. And when the derivative is sold, the Dax must be bought back again.
Investors have secured themselves
If a large number of hedges are dissolved and a corresponding number of put options are sold at the same time, prices can skyrocket. In stock market jargon, this is called a “short squeeze”. “If the current sideways movement is resolved upwards, the rally should pick up speed,” predicts Heibel.
Although he currently sees the potential of this rally as limited due to the rising interest rate expectations: “It might just be a last gasp.”
At the same time, the hedging positions limit the risk of prices falling low, Heibel continues: “If prices continue to fall, there will be many investors who will cover large hedging positions and thus create demand. So down below we have something of a safety net.”
mood in the United States
The put-call ratio on the Chicago Futures Exchange has continued to decline, indicating increasing risk appetite among US investors. Although the investment ratio of fund investors fell slightly from 85 to 81 percent, it is still at a high level.
“In the US, investors remain optimistic, although the fear of more rate hikes than previously thought put a damper on this week,” comments Heibel. “Yet the S&P 500 Fear and Greed Technical Indicator continues to show greed.”
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