Andelsblatt: Shares remain surprisingly stable despite the risks

Despite the war in Ukraine and the prospect of a tougher monetary policy, world stock markets remain remarkably stable. At the end of the quarter, the US S&P 500 index fell five percent compared to the beginning of the year, but had already recovered from its low minus 12.5%. European stocks and the MSCI World Index showed similar trends.

On Friday, there were strong data from the US labor market. Unemployment fell to 3.6%, while the number of new jobs created was slightly lower than expected. Investors saw this as proof of a good economy and therefore for the stock market. Overall, markets in Europe and the US remained green.

At Dax, low-profit online retailers such as Delivery Hero were in demand, showing that investors are willing to take risks. Bank shares did well across Europe, but badly in the US.

The rise in interest rates, as expected today, is often seen as a favorable factor for the lending activities of the industry. But this is a mixed blessing: first, there may be impairments in interest-bearing bonds due to the reversal of falling prices, and then, in the long run, customers may be reluctant to lend because of more expensive terms.

The important Procurement Index will be published in the US on Tuesday, which can give signs of the strength of the economy. Production prices in the European Union (EU) are expected on Wednesday, which are important for the inflation trend.

The minutes of the March meeting of the US Federal Reserve (Fed) will also be published. On Friday, the American pharmaceutical giant Eli Lily will announce data on his profits. Overall, however, no significant impulses are expected from the data from today’s point of view.

Interruption of supply from China

In the short term, developments in Germany in particular will be determined by the war in Ukraine. At present, there does not seem to be any further escalation, but horrible news about the suffering of the civilian population. There is obviously a consensus in the government not to deprive Russia of oil and gas for the time being. If anything changes in this area, prices will react immediately.

The coronavirus should also not be underestimated. Commerzbank chief economist Jörg Krämer warns: “As China adheres to its zero-cost strategy, supply chain disruption remains a key risk for European and German manufacturers.”

In the long run, the global picture is also mixed. Good economic data, such as on Friday, sometimes weakens prices because they raise fears of a tighter monetary policy by the Fed. For now, however, there is apparently hope that the Fed will be able to achieve a “mild landing,” that is, a reduction in inflation without causing a recession.

At the same time, however, the yield on US two-year government bonds is now around 2.46%, above the price of ten-year bonds, which is just below 2.4%. This “reversal” between two and ten years is seen as an indication that markets are expecting interest rates to fall and, consequently, a weaker economy in the future.

Thus, the market sends two messages: At the moment everything is logically on the right track, but in the future it may become more difficult. Especially in Germany there is no reversal, although the risk of recession is higher here than in the US.

Inflation favors stocks

A commonly cited reason for the still strong stock markets is the fact that many companies still have large amounts of cash on their balance sheets. During the Corona period they absorbed liquidity for security reasons and this now also contributes to stability.

It is also very important that high inflation, which currently stands at 7.5% in the euro area, makes most other investments unattractive. Stocks are considered relatively resilient to inflation. This is especially true for companies that have a strong market position, including many companies that supply food and other everyday goods.

We can also explain the situation this way: The real return, ie the reported rate less inflation, is now deep in the red in both the US and Europe due to high inflation. Even if there is a whole series of interest rate hikes in the US and at least one in Europe, the real yield will remain low for the time being.

But it also means that monetary policy will remain de facto very relaxed for a longer period of time – the economy will slow down more than energy prices. If central banks manage to reduce inflation through higher nominal interest rates, then the real interest rate will rise very quickly – possibly in Europe in a situation that is still affected by scarce and expensive energy, or even more so today. This is a risk for the stock market.