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Market assessment: What potential for disruption does monetary policy have for the stock markets? | 01/14/22

Markteinschätzung: Welches Störenfried-Potenzial hat die Geldpolitik für die Aktienmärkte?

In addition to Omicron and the associated concerns about the economy, the tightened US monetary policy in particular is affecting the stock exchanges. To combat inflation, the Fed is considering another, fourth key interest rate hike this year, and even a net liquidity withdrawal is no longer taboo for them. After 13 years of “overwatering,” this appears to be a painful structural break for stocks. But how endangered is the liquidity boom, a long-dominant market theme, really? By Robert Halver Inflationary pressures in the US have risen to a 39-year high in Hollywood drama, at 7 percent yoy. The US Federal Reserve is therefore discussing four instead of three interest rate hikes. In addition to the price of money, she is also concerned with the quantity. Fed Chairman Powell also points to a shrinking of the balance sheet total as a bogeyman for the shares, which have made themselves very comfortable in the cozy corner of the liquidity boom for many years. For reasons of credibility alone, the Fed cannot avoid restrictions. However, the expected easing on the inflation front will help. In this way, the scarcity of primary products will decrease in the future. According to the Baltic Dry Index, the freight rates for bulk goods such as iron ore, copper or coal have also collapsed by a good 60 percent from their peak in early October. According to the Freighto’s Baltic Global Container Index, freight rates for containers have fallen by 15 percent from their record level. Although price pressure remains high in absolute terms, it is likely to be peaking.

Graphic 1: Price indices for freight rates for bulk goods and containers But what about the inflationary second-round effects that are feared as a result of price being passed on to customers or wage increases? These will certainly make themselves felt. Nevertheless, inflation expectations in the USA and also in the euro zone are showing the first signs of stabilization. In general, the chief economist at the ECB, among others, Lane, never tires of emphasizing that there is no threat of chronically high inflation. noun est omen. The introduction of real tightening of monetary policy looks different.

Chart 2: Inflation expectations USA and Eurozone

US monetary policy: the journey is the reward

When withdrawing liquidity, the Fed will probably be guided by the quantitative tightening between 2017 and 2019. In this respect, it will operate a passive drainage after the summer. In doing so, it would not appear as an active seller of bonds, but would rather – starting with an estimated USD 17.5 billion per month – refrain from reinvesting maturing bonds. It could then increase this tightening reinvestment effect by a further USD 17.5 billion per month until the balance sheet total decreases by USD 70 billion per month from January 2023. What initially sounds epochal by the end of 2023 at around 945 billion, but on closer inspection leads to a reduction in total assets of just over 10 percent. With then around 7.8 bio. US dollars, this would still be well above the figure of around 4 trillion at the beginning of the corona pandemic.

Figure 3: Total assets of the US Federal Reserve and yields on 10-year US government bonds This is not uncompromisingly hawkish monetary policy. The Fed is also known for its flexibility: it has always liked to keep loopholes open when it comes to the timing and extent of its balance sheet reduction. The next crisis is bound to come. And a permanent crisis is the dramatic US over-indebtedness. There is also no sign of a sharp turnaround by the US central bank when it comes to the development of the US key interest rate. Even if the Fed fully exhausts its planned interest rate hikes by the end of 2023 – four in 2022 and three in 2023 – the central bank interest rate will remain in business-friendly negative territory, taking into account its inflation forecasts. Last but not least, if the Fed starts its interest rate turnaround earlier, it will also be finished earlier. Basically, the Fed has presented the financial markets with a reassuring monetary policy roadmap.

Chart 4: Real US Federal Reserve rate The ECB is well behind the Fed in terms of tightening. The new President of the Deutsche Bundesbank, Joachim Nagel, wants to continue the stability-oriented course of his predecessor Jens Weidmann. Unfortunately, however, it must be said that the Bundesbank is now just a branch of the ECB, which – to put it diplomatically – has less sympathy for German stability criteria. Overall, the post-inflation yield on 10-year eurozone and US government bonds is not an attractive alternative for equities in 2022 either. If inflation isn’t tackled rigorously, it’s not the stock market’s enemy, it’s its best friend.

Chart 5: Real average return on 10-year government bonds from the USA, Germany, Japan and the world stock market

Market situation – The equity glass is half full

The dramatically increasing infections with the omicron variant no longer put the stock exchanges in shock as with previous corona variants. The presumably less severe course of the disease is regarded as decisive. In any case, the vaccination coverage and immunization of the population continues to increase. The realization that you basically have to live with Corona seems to be gaining ground around the world. Instead of massive lockdowns that are harmful to the economy, only regional and targeted restrictions are being made that are less of a hindrance to economic growth. In fact, economic optimism is growing. According to the investment consulting firm Sentix, economic expectations for the next 6 months will continue to stabilize worldwide.

Chart 6: Sentix sentiment economic expectations for the next 6 months In the forthcoming US reporting season for the fourth quarter of 2021, stabilization of earnings growth is becoming apparent after consolidation has been completed. The focus is primarily on economic values. The cyclical upswing is documented above all in industry and consumer stocks, which are still showing absolutely robust earnings growth despite the relative leveling off. However, there is no doubt about technology stocks with intact business models. Cloud computing and microprocessors or chips should be mentioned here. In general, numerous technology stocks, especially from the second row, have corrected significantly in recent weeks and reached attractive purchase prices again.

Diagram 7: Earnings growth in US sectors In contrast, so-called “meme stocks” without substance, which are offered and hyped up like sour beer on Internet platforms – also due to a less lavish monetary policy – are likely to increasingly disappear from investors’ radar. Overall, there is an adjustment, a certain shift into cyclical stocks. Value is in demand again. Last but not least, this means that Europe’s and Germany’s stocks benefit from their cyclical orientation and global economic perspective.

Diagram 8: Value development in relation to growth And with a view to the ebb of the current Omicron wave, the angels from the airlines and ports, tourism and leisure sectors that have long been lost also have some catching up to do. Last but not least, high-dividend stocks remain attractive and continue to clearly outperform relevant interest rate investments. The DAX companies alone will pay out around 45 billion euros in 2022. The geopolitical conflict surrounding Ukraine is certainly causing uncertainty, especially since further developments are difficult to assess. Further economic sanctions could affect Europe’s energy supply. On the one hand, around 50 percent of the EU’s gas imports come from Russia, with Ukraine being the main transit country. And on the other hand, the non-approval of the Baltic Sea pipeline would increase the gas shortage even more. However, a military escalation in Ukraine is not to be expected. Therefore, the Ukraine crisis will not become the crucial litmus test for the stock markets.

Sentiment and Charttechnik DAX – It remains volatile

The infernal trio – fear of interest rates, Omicron, economy – is holding back investor sentiment. However, the proportion of optimists minus the pessimists on the US stock market is slightly oversold and so no massive price slumps can be expected.

Chart 9: Share of optimists minus share of pessimists in the US stock market The investment ratio of US fund managers, which increased again at the beginning of the year, also speaks for relaxation. Interim irritations on the interest rate markets, negative corona news and geopolitical tightening still have what it takes to meanwhile comparatively significantly higher price fluctuations.

Diagram 10: Price fluctuations in the DAX and S&P 500 In terms of charts, the next resistance points in the DAX on the way up are 15,950 and 15,975 points. Above that are further barriers at 16,060, 16,070, 16,150 and 16,250. If the price weakness continues, the first supports await at 15,860, 15,803 and 15,752. Below that are the next stop lines at 15,724, 15,673 and 15,592 points. Legal information / disclaimer and principles for dealing with conflicts of interest at Baader Bank AG: https://www.roberthalver.de/Newsletter-Disclaimer-725Robert Halver heads the capital market analysis at Baader Bank. Image source: BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE, BÖRSE ONLINE

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