DAX Blues

Waiting for the next shockwave

Börse Frankfurt
Anyone seen a bear coming this way? Source: DPA

The last record high was hit on January 23. How quickly the mood can shift. Just like the Dow Jones Industrial Average, Germany’s DAX has lost about 10 percent of its value in the space of two weeks. And while the blue-chip index was showing some signs of recovery on Monday, many analysts doubt the bad times are over just yet.

“The next shockwave could come at any time,” said Robert Halver, chief capital markets analyst for Baader Bank. Markets are busy trying to find their footing in a new reality, and “this process will still take a while,” he added.

The volatility, which began with a surprisingly strong wages report in the United States on February 2, has startled investors who had grown accustomed to calmer times over the past few years. And despite many grumblings on this side of the Atlantic that US investors are overreacting, Germany’s DAX has promptly followed suit in the past week. One thing both sides can agree on: Now is not yet the time to panic.

“Just a classic day in the life of markets.”

Andree Moschner, Ergo wealth management

But it might be time to recalibrate. For the Dow, the current yardstick is 24,000 points after pushing toward 27,000 late last month. For the DAX, it is exactly half that. The German index closed just 100 points away from the psychological marker of 12,000 on Friday (see graphic below), though it was up about 1.5 percent again on Monday. Among the top German losers of the past week: Deutsche Bank, Allianz, Fresenius and Munich Re.

Just a few weeks ago, most investors were saying that breaking 14,000 was a matter of time for the DAX. The average prediction was that it would close above 14,000 by the end of the year at the latest. One week into the new normal, opinion on whether anything has fundamentally changed remains divided. “This is just part of a classic day in the life of markets,” said Andree Moschner, responsible for wealth management at German insurer Ergo. With Germany’s economy still chugging along, he remains convinced that the DAX will gain more than 10 percent this year.

Markus Reinwand, a stock strategist for the Frankfurt-based Helaba, is less optimistic. He predicts the Dow could fall as far as 21,000 and the DAX to 10,500 by the end of the year. Such is the massive gulf right now among market watchers.

Those that have suddenly shifted to gloomy forecasts will blame the United States and its sudden worries about inflation as the chief cause of the global tumult. German economists have shrugged off these fears as exaggerated. Similarly, most economists reject the notion that central banks will raise interest rates at a faster pace just because of one wage report. Even many market strategists in the United States, like Tilmann Galler of JP Morgan Asset Management, suggest the “fundamentals haven’t shifted” despite the recent volatility.

But the simple fact is that – however unjustified the cause – the reality on the ground has changed as a result. Rising bond yields have once again made government debt an attractive alternative for investors after years of such low returns that they were barely worth their salt. As of this week, you can get a yield of 2.85 percent on 10-year US Treasury bonds. That alone should continue to take some of the wind out of the sails of stocks in Europe, too.

12 DAX-01
February 2 marked the largest one-day point drop in the Dow Jones Industrial Average since 2008.

But this is not just about a cool breeze from the Atlantic. In Germany, the worrying signs for investors are stemming chiefly from politics. Yes, Angela Merkel has finally closed a deal to form a new “grand coalition” government after September’s uncertain election result. But the massive criticism of that deal over the past week, both from politicians and economists, has rattled investors. Perhaps that’s why US hedge fund Bridgewater has actively bet against the German stock market.

With Ms. Merkel’s Christian Democratic Union party handing the reins of the finance ministry over to the center-left Social Democrats, some analysts have even questioned whether Germany will abandon fiscal discipline. It’s an ironic twist given that international organizations and Anglo-Saxon economists have been clamoring for Berlin to loosen the purse strings for the past few years.

Germany’s likely new finance minister, Olaf Scholz, sought to allay those concerns in an interview over the weekend, telling Spiegel magazine that Social Democrats stand for “solid finances” and pledging to maintain his predecessor Wolfgang Schäuble’s commitment to balancing the books. But he also signaled a shift on Europe. “We don’t want to dictate to other European states how they should run themselves,” he said, adding that “certainly mistakes have been made here in the past.”

Those comments haven’t reassured investors. Eugen Keller, analyst an Bankhaus Metzler, points to the fact that the spread between bond yields in Germany and EU periphery countries (those member states that were at the center of the euro-zone’s debt crisis) is at its narrowest level since 2010. Added to that, the euro has once again lost ground against the dollar.

So where might the next shockwave come from? Possible data points this week include inflation figures from Britain on Tuesday and the United States on Wednesday, as well as quarterly growth figures from Japan, Germany and Italy. “One can only imagine fresh turbulence if inflation is higher than expected,” says Jim Reid, a strategist at Deutsche Bank research.

Christopher Cermak is an editor with Handelsblatt Global. Ingo Narat covers markets for Handelsblatt in Frankfurt. Peter Köhler and Robert Landgraf of Handelsblatt contributed to this story. To contact the authors: Cermak@handelsblatt.com and narat@handelsblatt.com

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