MARKET OUTLOOK/DAX slide is far from over

DJ MARKET OUTLOOK/the downturn in the DAX is far from over

By Manuel Priego Thimmel

FRANKFURT (Dow Jones) – The misery on the stock exchanges is far from over. Further rising inflation rates force central banks to take increasingly stringent monetary policy measures. A recession seems inevitable, and the growing number of corporate profit warnings is already casting its shadow. In addition, the Ukraine war threatens to escalate with Russia’s pending annexation of eastern Ukrainian territories – the use of nuclear weapons can no longer be ruled out.

The string of bad news does not end. Inflation rates continue to surprise on the upside, in Germany consumer prices have risen to double-digit percentages for the first time in more than 70 years. There are increasing indications that the inflation expectations of the population are ungrounded. Inflation threatens to become a self-fulfilling prophecy. The central banks must take decisive steps to counteract this.

Kein Ende des Zinserhöhungszyklus in Sicht 

Commerzbank now assumes that the ECB will raise the deposit rate in the first quarter of next year, not just to 1.75 percent as previously expected, but to 3 percent immediately. On the one hand, the analysts justify this with the risk that inflation expectations are not anchored. On the other hand, they assume that inflation will prove more stubborn in the coming year than previously expected due to the energy crisis and now expect a price increase of 7.0 percent in 2023 instead of the previous 5.2 percent.

In the US too, there is no end in sight to the rate hike cycle. Despite the fact that interest rates have already risen sharply, next Friday’s labor market report should still be very solid. The US Federal Reserve has little choice but to keep raising interest rates to deal with rampant inflation. Because central bankers have little influence on the supply side, they take measures to dampen demand.

Bank of England zeigt Dilemma der Geldpolitik auf 

Meanwhile, it is a given that economies on both sides of the Atlantic will slide into recession. This is likely to become all the more serious the more central banks raise interest rates. Central banks seem willing to put up with this in order to get inflation under control. At the same time, the increasing number of profit warnings shows that the gloomy economic environment has reached the companies. The third quarter reporting season, which is about to begin, is going to be tough.

Events in the UK financial market have shown that the normalization of monetary policy will be anything but easy. Due to the increasing turmoil in the local bond market, the Bank of England felt compelled to intervene to stabilize the situation by means of “temporary” bond purchases. The planned quantitative tightening has so far been postponed. Other central banks could very quickly find themselves in a quandary due to the mountains of debt built up since the financial crisis, because debt and higher interest rates do not mix well.

Der Markt ist nur optisch billig 

The Ukraine war has what it takes to trigger completely different volatilities in the markets than the central banks. With the upcoming annexation of eastern Ukrainian territories and their incorporation, the conflict threatens to get completely out of control. Because as soon as these regions become “Russian”, the Kremlin understands that hostilities there can be declared direct attacks on the territory of the state. President Putin has repeatedly stated that in such a case he would not shy away from using nuclear weapons – experts take this threat very seriously.

Even without a nuclear war, stock markets are likely to be far from bottoming out. With a price/earnings ratio currently of 10, the DAX is cheap, but given that corporate profits are likely to be revised soon, this is likely to be little more than an optical illusion. An evaluation indicator that has proven itself in times of crisis, the price/book ratio, is only just below 9,500 points in the DAX of 1. A test is to be expected in these times of crisis, and it will go even lower in the event of a nuclear attack.

Contact the author: manuel.priego-thimmel@wsj.com

DJG/mpt/error

(END) Dow Jones Newswires

September 30, 2022 07:40 ET (11:40 GMT)

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