Dusseldorf The German stock market coped well with the recent interest rate decision in the USA. The leading index Dax even turned positive on Thursday afternoon and was 0.1 percent higher at 15,232 points. In the course of the day, the Frankfurt stock exchange barometer was never more than 0.9 percent in the red.
In the USA, the Fed’s interest rate hike by a further 0.25 percentage points on Wednesday evening triggered much more violent reactions. The leading index Dow Jones and the market-wide S&P 500 each closed 1.6 percent in the red. On Thursday, however, both indices started the day with gains.
With the Dax, investors now have to pay attention to two brands: The moving average price of the past 200 days, which shows the long-term trend, is around 15,300 points. This area is a resistance, should the Dax rise above it, i.e. on a daily basis and on the following day, that would be a sign of further price gains.
On the downside, note Tuesday’s upside gap at 14,980 points. Such gaps occur when the low of a trading day is higher than the high of the previous day. If such an upside gap is not closed quickly, it will become support. Should the Dax fall below this mark, the support would also break away.
There are two reasons for the current market reactions.
1. Fed and market expectations diverge
Investors had expected the Fed to signal an end to rate hikes on Wednesday night. After all, it was the sharp rise in interest rates that led to the collapse of the Silicon Valley Bank and thus triggered the crisis in the regional banks in the USA.
But the Fed reacted differently than expected. While the 0.25 percentage point rate hike was in line with market expectations, Fed Chairman Powell made it clear that the banking crisis does not automatically mean that monetary authorities will give up the fight against inflation.
According to Michael Heise, chief economist at wealth manager HQ Trust, the Fed is showing a certain degree of composure in the face of the recent financial market turbulence. “Similar to the ECB, the Fed is focusing on separating liquidity policy measures to stabilize the banking system and interest rate policy measures to combat inflation,” explains Heise.
Markets are pricing in at least two rate cuts
However, the Fed’s and the market’s assessments of future interest rate developments differ widely. The latest rate projections by Fed members, the dot plots, show: They expect the federal funds rate to be between 5.00 and 5.25 percent by the end of 2023. That would equate to another rate hike of 0.25 percentage points and no rate cuts.
The Fed Watch tool of the largest futures exchange CME, on the other hand, currently only shows a probability of 0.3 percent for the last December meeting that the key interest rate will actually be at this level. The majority of market participants are anticipating a key interest rate in the range of 4.00 to 4.25 percent or 4.25 to 4.50 percent. That would equate to at least two rate cuts of 0.25 percentage points from current levels.
We have long been of the opinion that the steepest cycle of interest rate hikes in decades will put considerable pressure on interest-rate-sensitive corporate investment demand in the course of this year, triggering a corresponding recession. Andreas Busch, Bantleon economist
Andreas Busch, economist at asset manager Bantleon, assumes that the Fed will have to lower interest rates significantly in the second half of the year at the latest to support the economy. “We have long been of the opinion that the steepest rate hike cycle in decades will put pressure on interest-sensitive investment demand from companies over the course of this year and trigger a recession accordingly,” says Busch. The current uncertainty in the banking sector will tend to accelerate the process.
That Fed and market expectations are so far apart has the potential to move markets further. Because in the long term both cannot be right, one of the parties will have to adjust its expectations – with corresponding reactions from the markets.
2. Banking crisis remains an acute issue
With the further increase in interest rates, a further spread of the current crisis in the US regional banks also remains an acute danger. Many investors had hoped that there would be blanket insurance for bank deposits – this hope was disappointed.
Instead, Fed Chairman Powell described bank deposits as safe. Treasury Secretary Janet Yellen later stated that she did not intend to significantly expand deposit insurance.
Another bank run remains investors’ biggest fear, explains analyst Jochen Stanzl from online broker CMC Markets. In such a case, many customers try to withdraw their deposits at the same time. However, since the banks convert the deposits into long-term loans that they issue, all customers can never be served at the same time. This can lead to bank failure and spread to other institutions.
“The Fed acted as if they were groping in the dark and said it was too early to make a definitive assessment of the banks’ situation,” says Stanzl. “With this strategy, she probably tried to quell further questions from the journalists for the moment.”
Look at the individual values
Banks: After the interest rate hikes by the central banks in the USA (Wednesday), Switzerland and Norway (both Thursdays) are hit harder by European bank stocks. The European sector index slipped by 2.2 percent. Commerzbank shares are at the bottom of the Dax with a drop of three percent, while Deutsche Bank shares lose more than one percent. Investors had hoped for a pause in interest rates due to the turmoil in the banking sector.
Analysts at Citigroup downgraded the European banking sector to neutral from overweight. The fundamentals for the institutes look healthy. “But the ongoing crisis of confidence could limit banks’ risk appetite and reduce credit flows,” the equity strategists said.
Rheinmetall: The shares of the armaments group scratched their record with an increase of around 1.5 percent. Here there was progress with a possible order of more than 100 Boxer tanks from Australian Rheinmetall production by Germany.
German Stock Exchange: The stock exchange operator is benefiting from the recent stock market fluctuations. The share initially rose 1.5 percent and reached a record high, but was recently only just up.
Vitesco: Shares in the auto supplier fall by more than eight percent. The experts at Jefferies commented that Vitesco’s outlook was somewhat weaker than expected by analysts on average.
Nemetschek: The titles of the construction software manufacturer are increasing by more than ten percent, although it expects slower growth due to the switch to a subscription model in 2023. According to Stifel analyst Chandramouli Sriraman, however, the outlook shows that the subscription model will pay off in the coming years. Then Nemetschek expects growth to accelerate.
Scout 24: The online real estate marketplace is paying its shareholders more dividends after a strong increase in profits last year. That is well received, the share increases by more than three percent.
The reaction of other asset classes
Currency: The euro rose slightly to $1.09. Commerzbank analyst Ulrich Leuchtmann explains this by saying that the US Federal Reserve’s current statement on the interest rate decision sounds much more cautious than it did in February.
In February it said: “The committee believes that further increases in the target range will be appropriate.” Now the Fed wrote: “The committee believes that some additional tightening of monetary policy may be appropriate.”
“Fed Chair Jerome Powell then emphasized this more cautious language in the press conference,” said Leuchtmann. “So it shouldn’t come as a surprise that the dollar has fallen significantly, not dramatically.”
bonds: In the bond market, the reaction to the Fed meeting is mixed. After the most recent rise in yields, they initially fell, but most recently they were back at the level of the previous day.
Gold: The price of gold is rising slightly, but at just under $1980 it is still well below the high for the year of $2010 reached on Monday.
However, Alexander Zumpfe, a trader at precious metals specialist Heraeus, believes that this brand could soon come into focus again: “If the impression is that the phase of interest rate hikes is coming to an end, gold will remain in demand. Prices above $2000 will then come within reach again.” The metal hit its record high of $2075 in 2020.
Oil: Oil prices ease slightly. A barrel (159 liters) of North Sea Brent for delivery in May recently cost a good 76 dollars, 0.7 percent less than the day before.
The oil market is still ailing. In recent weeks, he has been weighed down by the banking turmoil in the US and Europe. Crude oil prices fell to 15-month lows earlier this week. Since then, the situation on the markets has eased somewhat.
Bitcoin: The price of the oldest and most important cryptocurrency is currently around $27,600. On a 24-hour perspective, that means a minus of almost two percent.
Bitcoin had recently risen significantly in line with tech stocks in the US. Similar to the Nasdaq, Bitcoin can therefore be profit-taking after the recent rally.
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