Dusseldorf The German stock market is reacting with great nervousness to the hawkish behavior of the European Central Bank. The Dax closed 3.3 percent weaker at 13,986 points on Thursday. This level is roughly the daily low. Overall, the stock exchange barometer lost 474 points, all 40 individual values closed in the red.
Other stock indices were also listed in the deep red: the MDax lost 2.3 percent, the leading eurozone index EuroStoxx 50 even 3.5 percent and thus more than it had in nine months. The mood on the US stock exchanges is also bad.
The ECB hiked interest rates in the euro area by a further 50 basis points, which was what the markets had expected. But the clear announcement by the head of the central bank, Christine Lagarde, that a series of further increases would follow in the new year caused prices to fall further. “Until today, the stock markets have been quiet before Christmas,” said Thomas Altmann from the investment company QC Partners. “The ECB has now put an abrupt end to this calm.”
In addition, the central bank is starting to reduce its balance sheet. It will not fully reinvest the repayment amounts from maturing bonds, but will withdraw liquidity from the market from March 2023. Initially, that will be 15 billion per month.
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However, the emission volumes will be high in the coming year due to energy price support programs, but the ECB will then no longer be available as a buyer. For example, Germany will raise a record volume of 539 billion euros on the bond market in the coming year.
Yields on the bond market rose significantly after this ECB decision. The value for a ten-year federal bond was 2.08 percent in the evening after 1.94 percent previously. The yield on a two-year federal bond immediately jumped from 2.16 to as much as 2.40 percent.
Another piece of bad news comes from the updated ECB forecasts for economic growth and inflation. The ECB is postponing the economic recovery further into the future. For 2023, the monetary watchdogs only expect mini-growth of 0.5 percent.
At the same time, the central bankers are raising their inflation forecasts for 2023 and 2024. “This makes the much-dreaded stagflation scenario a good deal more likely,” says Altmann.
>> Read here: How ECB President Lagarde justifies the decisions of the central bank – the press conference
As a result of the price decline, the leading index slipped below its four-week trading range, which was between 14,584 points on the upper and 14,150 points on the lower side. The breakout attempt last Tuesday due to declining US inflation figures had failed anyway.
Now the area just below the 14,000 mark is considered the next support. At 13,948 points, for example, is the high point from the stock market month of August.
The market is in a difficult situation in view of the flood of news about the interest rate decisions by the central banks – the Swiss National Bank had already doubled the key interest rate in the morning and the Bank of England also raised the interest rate – and the big expiry day on Friday, called the Witches’ Sabbath.
In addition, there are only eleven trading days left until the end of the year, a date that is particularly important for professional asset managers. So-called “window dressing” usually occurs in the last trading days of the year. By this, stockbrokers understand purchases and sales of shares that have been particularly good or bad to date, in order to look as good as possible in the year-end statement.
Investors brace for consolidation
The sentiment survey conducted by the Frankfurt Stock Exchange among medium-term private investors and professionals does not indicate any major imbalances that would signal a significant slide in prices.
Behavioral economist Joachim Goldberg believes that domestic investors are prepared for consolidation, but not for larger gains. In addition, international investors who would slowly give up their extreme underweighting in European stocks would also buy. “Should this underweight be further reduced in the coming weeks, this would reinforce the positive trend,” explains the sentiment expert. “Things continue to look good for the Dax.”
Market doesn’t believe US Federal Reserve
The interest rate decision by the US Federal Reserve with an expected interest rate hike of 50 basis points was anything but a “knot solver”. US Federal Reserve Chairman Jerome Powell went to great lengths to disappoint the market.
As recently as September, the majority of monetary watchdogs had expected a key interest rate of between 4.25 percent and five percent for the end of 2023. On Wednesday they presented far higher forecasts: Almost all were over five percent, some over 5.5 percent.
But all the words and “dots”, as the interest rate forecasts of the US central bankers are called, did not help. The financial market professionals don’t believe Powell and his colleagues on the Federal Open Market Committee (FOMC).
According to the Chicago futures exchange CME’s Fed Watch tool, a clear majority of professionals continue to expect a maximum interest rate of just five percent and rate cuts by the end of the year. The futures contracts on the US key interest rate, the so-called Fed Fund Futures, also continued to expect a key interest rate level of 4.35 percent after the end of the press conference – despite the significantly higher forecasts.
The experienced Commerzbank analyst Ulrich Leuchtmann says: “I have rarely seen the market so ostentatiously ignore the message of a Fed chairman.”
Leuchtmann also sees comparisons with the great recession of 2008, the year of the financial crisis. “Back then, the FOMC had been forecasting completely unrealistic gross domestic product paths and interest rate paths for ages – contrary to all economic theories,” he recalls.
And this time, too, there is a discrepancy in the prognosis. While the market expects consumer price inflation to be 2.5 percent by the end of 2023, US monetary authorities estimate the rate at 3.7 percent. “Again, the economic forecasts of the market and the FOMC differ significantly and consequently their interest rate outlook,” explains Commerzbank’s foreign exchange expert.
The course of inflation should decide who is right: the market or Powell? If the US Federal Reserve were right, it would have a negative impact on the market development, otherwise it would already be priced into the prices.
Look at individual values
Technology Values: On the losers’ lists are stocks for which rising interest rates are seen as a problem. These include certain stocks from the technology sector, above all German online stocks. Zalando is the weakest Dax value at minus 7.7 percent, Delivery Hero lost 4.6 percent in the MDax. From the SDax, the Auto1 titles dropped more than eight percent at times. Bank of America dropped its previous buy recommendation for the online car dealership.
Economy: The electronics retail holding wants to achieve a significant improvement in profits and a slight increase in sales in the current 2022/23 financial year. The prerequisite for this, however, is that the general economic conditions do not deteriorate any further. However, the stock slipped 13 percent.
There were also statements about the future from the former Ceconomy mother Metro. Here, the price fell, similar to the market, by a little more than one percent, although the retail group wants to return to profitability in the new financial year and has increased its medium-term sales forecast.
Munich Re: The shares of the reinsurer, which were only 2.6 percent in the red, did slightly better than the market. As the world’s largest reinsurer surprisingly announced on Wednesday evening, it is aiming for a consolidated profit of around four billion euros for the coming year. Investors found it difficult to classify, because the key figure is based on a new accounting standard and is therefore not comparable with previous year’s figures.
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