Andelsblatt: Uncontrolled Inflation and Troubled Economy – Investors Expect Continued High Stock Market Pressure

Central banks are tightening their grip on the capital markets, according to Handelsblatt.

The European Central Bank (ECB) has suffered significant losses in equities and bonds since Thursday. Earlier, ECB chief Christine Lagarde announced the first rate hike in eleven years due to persistently high inflation and voiced the prospect of another rise in September.

On Friday, an unexpectedly sharp rise in US prices fueled fears that an even greater tightening of US monetary policy could stifle the economy. Therefore, strategic market analysts expect that the stock markets will move again in the new week.

“Stock markets are groaning under inflation concerns as well as supply chain problems and declining financial confidence.” sums up Ulrich Kater, chief economist at its Dekabank savings subsidiary.

In bond markets, the sharp rise in inflation expectations put pressure on prices and “raised yields dramatically.”

And, according to many experts, this will remain the case for the time being. “Rising interest rates are putting pressure on all asset prices. This pressure is likely to continue until inflation is reduced and the outlook for more stable economic growth improves.” expects Christian Kahler, chief stock analyst at DZ Bank: “It will take some time until then.”

It is difficult not to lose money in this environment, it is its sober analysis.

Eric Winograd, an economist at Alliance Bernstein, agrees: “Rising interest rates pose an increased risk of recession, as it is difficult for central banks to effectively tighten their policies without overdoing it.” However, the gradual policies of the big central banks and the low initial level of interest rates comfort him, the expert explains. He does not assume the worst from an economic point of view: “We expect the world economy to slow down without stopping.”

US Federal Reserve cut interest rates on Wednesday

Following the ECB decision and US inflation data, key stock indices and bond prices came under heavy pressure last week: The US Dow Jones industrial average closed 2.7% lower at 31,392 points on Friday. The technologically heavy Nasdaq fell 3.5% to 11,340 points. The broad-based S&P 500 lost 2.9% to 3,900 points.

Inflation in the US rose to 8.6% year-on-year in May. Analysts expected an increase of only 8.3%.

The top German Dax index fell 3.1%, closing more than 400 points lower at 13,762 points. The top index of the Eurozone Euro Stoxx 50 also lost more than three percent at 3599 points. Overall, the indexes lost about five percent last week.

Investors also recorded further price losses in bond markets. On the other hand, yields continued to rise. The yield on the most important government bond in the world, the ten-year US government bond, was at 3.047% before the issuance and then rose to 3.146%. The yield on the German ten-year Bund also reached a new eight-year high of 1.501%.

In the new week, the Fed decision on interest rates on Wednesday will be at the center of the stock market activity. For investors, the increase in the key US interest rate by half a percentage point next Wednesday is a given. They expect another move of this magnitude at the July meeting.

“Particular attention will be paid to the subsequent course of interest rate advice,” said Kater of Deka. Due to the weakening economic dynamics, which is slowing down no less than the reduction of consumer purchasing power, some strategists and economists expect that the Fed will flatten its interest rates as early as the fall. Some expect smaller increases of about a quarter of a percentage point each or even a pause.

Supply chain problems as a further aggravating factor

However, John Vail, chief investment strategist at Japanese asset management company Nikko, said this was unlikely, as inflation would have to recede for several months in a row for that to happen. One day after the Fed’s decision on interest rates, the Bank of England will make its decision. Here, strategic analysts expect the central bank to also raise its key interest rate, but only by a quarter of a percentage point.

Due to the meetings of the central banks, the financial data is likely to play only a minor role in the new week. In the US, US retail sales are on the agenda just hours before the Fed’s decision on Wednesday. Experts expect growth to slow to 0.2% in May.

The consumer sentiment of American consumers is considered the main pillar of the world’s largest economy and allows conclusions to be drawn about US monetary policy. If the results turn out better than expected, however, this could put a strain on the stock market, says Natalia Bucci, fund manager at Swiss Lombard Odier. This is due to the fact that they fuel speculation that interest rate hikes will remain rapid.

In Europe, investors will look at the ZEW index, which reflects the mood of professionals in the German stock market and will be published on Tuesday. Commerzbank analyst Christoph Balz expects the German economy’s barometer for the next six months to rise for a second straight month in June, but will remain deep in negative territory at minus 25 points. “Meanwhile, confidence seems to be rising again, most likely because risk scenarios, such as the complete cessation of Russian energy supplies, have not been implemented so far,” he said.

Nevertheless, the environment remains difficult for investors at the moment, as Kahler from DZ Bank sums it up – but he would like to give investors some hope: After all, a lot of bad news has already been priced, says the strategic analyst . Investors could benefit again if there is a shift to one of the current negative factors – Covid in China, supply chain congestion, Russia-Ukraine war. He then expects a “significant price recovery”.