A market phase characterized by great uncertainty.
(Photo: dpa)
Dusseldorf The German leading index Dax has now made up half of its annual losses. How things will continue on the markets is still uncertain for many investors, according to the weekly Handelsblatt survey Dax-Sentiment. The mood is still slightly depressed, but “there is not much left of the extremely negative mood values at the beginning of the year,” says sentiment expert Stephan Heibel.
The market has already processed several negative news items with the Russian invasion of Ukraine, rising interest rates worldwide, rising commodity prices and high inflation. The fact that the Dax has moved sideways in a range of 14,100 and 14,550 points in the past two weeks could be a sign that many of the developments described have already been priced into the current prices.
In this respect, a further escalation in the Ukraine war would not cause a crash, believes Heibel. “The stock market has – at least here in Germany – prepared for the worst and would perhaps react violently, but only briefly and then be quickly absorbed,” says the managing director of the analysis company AnimusX.
Heibel bases his expectation on the fact that hedging is now higher again: The Euwax sentiment of the Stuttgart Stock Exchange, where private investors trade, has slipped to minus 2.5. This shows that some hedging products are already being bought against falling prices.
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The shift among institutional investors is even clearer. At 4.3 percent, the put/call ratio on the European derivatives exchange Eurex rose to its highest level in the past six months. The higher the value, the more puts – i.e. protection against falling prices – are bought. “Institutional investors have therefore secured themselves against falling prices and another crash,” says Heibel.
This high level of protection makes another sharp sell-off in the Dax unlikely. “Of course, the European stock markets will sell out if there are signs of a supply stop for energy from Russia,” explains Heibel. “But since investors have currently hedged heavily against such price losses, a corresponding sell-off could remain manageable. Investors would then cover their put hedges at an early stage, thereby creating demand that should stabilize the stock market.”
Put options work in much the same way as 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.
Even if the situation in the Ukraine war does not deteriorate any further, the high level of hedging could even cause prices to rise significantly. “From a certain price level, the hedging positions would then have to be liquidated successively, which then acts like tinder for a rally,” says Heibel.
Should the Dax break out of its current sideways movement, i.e. rise above the “war high” of 14,568 points, many hedging positions would run into the red. “At some point they would then be dissolved, which can only be done through additional share purchases,” says Heibel.
More poll results
The clear majority of the approximately 6,500 private investors surveyed by the Handelsblatt were satisfied with the course of the past stock exchange week. For almost 70 percent of those surveyed, the expectations were either largely or fully met.
This makes survey participants increasingly complacent. The uncertainty of the previous weeks disappears completely with a value of 0.0. At the end of February, this value was still minus 9.5 – the lowest level since the corona crash in March 2020. More than half of those surveyed currently see the Dax moving sideways.
With regard to further developments, however, opinions differ. In three months, around a third sees an upward movement (29 percent), a sustained sideways movement (38 percent) or a downward movement (33 percent).
As a result, future expectations remain at a moderately optimistic level of 1.1. Although the Dax is now significantly cheaper than it was in December, when investors were euphoric about the expected future development of the stock market, investors are unsure whether the current price level can actually be regarded as favorable or not.
After all, the framework conditions have changed significantly since then, analyzes Heibel: “Energy and food prices have jumped significantly and the geopolitical situation is highly uncertain. So it’s no wonder that investors don’t feel any significant optimism despite the more favorable price level.”
As a result, the willingness to invest has also fallen from 3.6 to 2.1. Only 25 percent say they intend to buy in the next two weeks, compared to 32 percent in the previous week. The camp of the undecided, on the other hand, has grown from 58 percent to 62 percent.
In the first week of the Ukraine war, the willingness to invest was still 5.0 and thus at the highest level since the corona crash. “Investors obviously used the crash for short-term speculation, but now a much more neutral, defensive stance is prevailing,” explains Heibel.
location in the United States
Trading on the largest US futures exchange CBOE shows a completely different hedging behavior than in Europe. Although the ratio is at a comparatively high level, it has been declining for a few weeks. So US investors have hedged ahead of the late February crash and are now slowly unwinding their hedges.
From the point of view of the Americans, this is understandable, says Heibel. For many of them, the Ukraine war is initially not much different from Russia’s invasion of Georgia or Chechnya: “A brief shock, then it’s back to business as usual. I have the impression that many Americans underestimate the explosiveness of the Ukraine war.”
He also attributes the different mood values in Germany and the USA to the situation on the energy market. “Dax companies run the risk of having to bear significantly higher energy costs – provided there is enough electricity. The US has an abundance of oil and gas.”
US fund investors are also becoming more optimistic. They have increased their investment ratio, which had fallen to a record low of just 30 percent before the outbreak of war, back to 53 percent. The ratio between optimists (bulls) and pessimists (bears) is also converging. Among US private investors, the bear camp is only three percentage points larger than the bull camp. A week ago the difference was 28 percentage points.
The technical fear and greed indicator of the market-wide US index S&P 500 has risen to 46 percent and is now showing a neutral market condition again. The much more volatile Short Range Oscillator, on the other hand, has jumped to a value of five percent, signaling an overbought market. “Therefore, a small setback is to be expected, at least in the short term,” says Heibel.
situation in the bond market
The Bund future — a futures contract related to a notional 10-year Bund — has fallen below 160 for the first time since 2018. Bond investors are obviously expecting interest rates to rise sharply. When government bond yields rise, Bund futures prices fall and vice versa. This construct allows investors to bet on rising or falling returns.
Heibel sees both the mood and the expectations on the bond market on the ground: “From the point of view of sentiment analysis, it looks like panic on the bond market. A final sale. It is quite possible that we are seeing a proper countermovement here, i.e. a rising price for the Bund future and thus falling interest rates on the bond market.”
There are two assumptions behind surveys such as the Dax sentiment with more than 6500 participants: If many investors are optimistic, they have already invested. Then only a few are left who could still buy and thus drive prices up. Conversely, if investors are pessimistic, the majority of them have not invested. Then only a few can sell and thus depress the courses.
Do you want to take part in the survey? Then let yourself be informed automatically about the start of the sentiment survey and register for the Dax sentiment newsletter. The survey starts every Friday morning and ends on Sunday afternoon.
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