The stock markets are entering the second half of the year split. On the one hand, global leading indicators are even signalling V-shaped economic recoveries with the active help of monetary and fiscal policy.
On the other hand, the economic recovery must actually work, especially since the increasing number of corona infections worldwide is feeding concerns of renewed shutdowns. Which side will get the upper hand?
Second wave of infection yes, general lockdowns no
China and Europe consistently demonstrate that the containment of the corona virus can be successful away from local outbreaks. In contrast, new infections in the USA mark new record levels almost daily, especially in the southern and western states. However, US policy only aims to contain virus infections regionally and carefully so as not to jeopardize the economic recovery process. Against this backdrop, there is also no reason to call for a general lockdown.
Good hard economic data as a debt to be repaid
Politicians continue to do everything possible to boost the economy. In the USA, for example, the planning of a fifth economic stimulus package is progressing. On the positive side, it focuses primarily on improved location conditions, infrastructure and digitalization.
The massive brightening of sentiment in the US economy – the strongest rise in the ISM index for industry in almost 40 years – should soon be followed by hard data in order not to give rise to new economic skepticism. Specifically, we are waiting for improved long-term industrial orders.
Nevertheless, the labour market has delivered a solid job creation for the second month in a row. The employment crisis has passed its peak remarkably well.
Stability occurs only in political Sunday speeches
With the Corona crisis at the latest, the central banks have become the agents of state reconstruction. They pay the debt cap, they provide state financing.
According to the latest minutes of its meeting, the US Federal Reserve is already examining the Yield Curve Control (YCC) instrument. This yield curve control not only controls the level of short-term interest rates, but also that of longer-term interest rates. For example, the Fed could tell the market that it wants to anchor the yields of 10-year US government bonds at zero percent. This specific announcement alone would exert significant yield-reducing pressure on the entire yield curve. Bond purchases will do the rest. There would thus be an abundance of central bank money at even more favourable conditions. With increasingly planned economy methods, the financing of the US state budget is secured without painful credit terms.
In Europe, too, the ECB remains the killer argument against any new sovereign debt crisis. The Bundesbank’s spirit of stability has finally evaporated through the open windows in the meeting room of the ECB board of directors.
Before the EU summit on 17 and 18 July, there will still be frictions about the reconstruction fund in terms of stability policy with regard to the granting of generous monetary gifts to the economically ailing southern euro states. However, with the force of the Franco-German alliance, the further grinding of the European stability criteria will continue. Berlin, too, is now of the opinion that priority should be given to European cohesion.
The financial markets regard stability as a luxury that can no longer be afforded. They are complaining that a new euro crisis is off the table for the time being.
US policy as an equity handicap?
In principle, the stock markets must prepare themselves for interim irritations in trading conflicts until the US presidential election in November. After all, two-thirds of Americans like the enemy image of China. Trump will accuse his rival candidate Joe Biden of having supported Obama’s restrained approach to China as Vice President under Obama.
Nevertheless, behind Trump’s façade as an unyielding trade warrior, a great deal of realism is revealed. During the election campaign he does not need further trade-related frictional losses for the economy and stock markets. Conversely, export China, too, has no interest in new trade escalations in order not to endanger its own economic recovery.
Currently Biden is clearly ahead in surveys. Meanwhile, even Republican voters and politicians are turning away from the landlord-style management style without a strategic guard rail system. Nothing has been decided before the election, partly because of the majority voting system in America. In principle a President Biden would also be acceptable to Wall Street.
Market situation – crash fear is inappropriate
Basically, the most extensive economic stimulus packages and the greatest economic catch-up effects are met by the lowest interest rates and the most generous financial resources. The liquidity boom in particular, with the consequence of unattractive interest rates, maintains an investment shortage that provides a stable basis for equities as an investment alternative.
Fundamentally, the beginning of the reporting season is certainly a challenge for the stock markets.
According to financial data provider Refinitiv I/B/E/S, analysts expect the S&P 500 to post a 42.8 percent year-on-year decline in earnings in the second quarter. This will affect all eleven sectors of the leading index.
This makes the outlook all the more important, specifically the extent to which it points to a comeback of corporate earnings in 2021 in view of the positive leading indicators.
According to the ifo Institute, the German economy is likely to grow strongly step by step in the second half of the year: An increase over the respective previous quarter is estimated at 6.9 percent in the IIIrd quarter and 3.8 percent in the IVth quarter. However, the difficult to assess corona crisis also offers plenty of room for disappointment worldwide. After all, economic optimism is breathing new life into the profit growth of German companies.
But also worldwide the profit trend as a fundamental force on the stock market seems to be gradually turning around.
China, which was the first country to be affected by the virus crisis, is also the first country to show signs of a growing economy again with major positive effects on industrial profits. In fact, for the first time in six months, they are rising sharply.
For the stock markets, much depends on whether the virus and economic data develop worse than priced in. In principle, fears of a second wave of infection will remain until a vaccine is available. It is hopeful that after treatment with one of the vaccine candidates developed by the German biotech company Biontech, all test persons have developed corona antibodies.
Sentiment and chart technique DAX – initially broad sideways trend
From a sentimentary point of view, investors are initially waiting, which is reflected in a renewed decline in the investment ratio among US fund managers. A second sell-off wave is not feared, however.
As a counter-indicator, the share of optimists minus the share of pessimists in the US stock market is below the first standard deviation, thus pointing to stabilization.
At the moment, stocks below 12,200 points on the DAX are seen as a buying opportunity, albeit only for speculation and less for long-term persuasion buying.
On the one hand, a lot of positive news has been priced in, but its significance also rules out a significant consolidation, let alone a crash. All in all, the stock price performance over the summer remains volatile in a broad sideways trend. According to the VDAX New Volatility Index, the range of fluctuation for the next 30 days lies between 11,512 and 13,704 points.
On the charts, an initial resistance level of 12,615 points is on the way up. A further barrier then follows at 12,700. In case of another downward movement, first supports are at 12,400, 12,350 and 12,156, followed by holding lines at 12,118, 11,925 and 11,807 points.
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