Dusseldorf The German stock market extends its losses after the decisions of the European Central Bank (ECB). The Dax slipped another 150 points and is more than two percent in the afternoon and is trading at 14,168 points, almost 300 points less than at the end of the previous day.
The rate hike of 50 basis points had been expected. But there is two bad news, which prompts Thomas Altmann from the investment house QC Partners to comment: “Until today, the stock markets had been quiet before Christmas. The ECB has now brought this calm to an abrupt end.”
On the one hand, the ECB 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.
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.
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Yields on the bond market rose significantly after this ECB decision. The value for a ten-year federal bond is 2.02 percent after 1.94 percent before. The yield on a two-year federal bond immediately jumped from 2.16 to 2.29 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.
>> Read here: How ECB President Lagarde justifies the decisions of the central bank – the press conference
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.
Nevertheless, the leading index has so far remained in its four-week trading range, which is 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. Now a test of the lower mark should be imminent.
It is a difficult situation on the market in view of the flood of news with the interest rate decisions of the central banks – in the morning the Swiss National Bank had already doubled the key interest rate and the Bank of England also raised the interest rate – and the big expiration day on Friday, called the Witches’ Sabbath.
“Window dressing” probably
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.
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.
Investors brace for consolidation
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
Yesterday’s interest rate decision by the US Federal Reserve with an expected interest rate hike of 50 basis points was anything but a “tangle breaker”. 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. Yesterday, 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 market doesn’t believe Powell and his colleagues on the Federal Open Market Committee (FOMC).
The financial market professionals do not believe that the Fed interest rate will actually be that high at the end of 2023. 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.
Investors should pay attention to inflation developments in the coming months
The experienced Commerzbank analyst Ulrich Leuchtmann is also certain: “Rarely have I 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.
Investors should pay attention to inflation developments in the coming months. That 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. Delivery Hero, for example, lost 3.5 percent of its value in the MDax. From the SDax, the Auto1 titles fell even more sharply by 8.3 percent. 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 8.8 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.
Munic Re: The reinsurer’s shares, which are trading at the previous day’s level, are doing 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.
HM: The Swedish fashion group, the world’s number two behind Zara’s parent company Inditex, grew a little more than expected in the fall. However, the share price is down more than four percent on the German market.
The group’s operations in Russia and Belarus were wound up during the quarter, remaining inventory was sold and the last stores were closed on November 30th. In addition, 25 to 50 shops have been temporarily closed in China in the past few months due to the corona lockdowns. H&M was recently unable to keep up with its larger competitor Inditex and was the first major European retailer to cut staff. This should save two billion crowns a year.
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