What Goes Up

  • Why it matters

    Why it matters

    Prospects of tighter European monetary policy stand to rattle stock markets in the fall.

  • Facts


    • Germany’s DAX index nearly reached a record 13,000 points in June, but the rally is surely over. The index almost fell below 12,000 last week.
    • Investors are bracing for volatility, as a rising euro dents corporate earnings and interest rates look set to rise.
    • On the upside, Europe’s economy remains strong and liquidity levels are high, so falling share prices may trigger buying.
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FILE PHOTO: Frankfurt stock exchange building
Frankfurt's stock exchange. Some fair-weather friends of market rallies are preparing to depart. Source: Reuters

Since way back in 2009 – just one year after the subprime mortgage crisis sideswiped the global economy – leading stock markets have looked unstoppable, chasing record after record. In June, Germany’s DAX index of 30 leading stocks stood at more than twice its pre-crisis level, and seemed poised to crack a key threshold at 13,000 points for the first time.

But before traders could toast the moment, the party fizzled. At the end of last week, the DAX slipped perilously close to 12,000, as fears over the euro’s rise in Germany’s export-led economy combined with disappointing second-quarter results to spook investors. Analysts are predicting a turbulent fall.

Just a few months ago, currency strategists were forecasting the euro would crumble to parity against the dollar. Instead, it has leaped to $1.18, a two-and-a-half-year high. Some strategists see the currency reaching $1.20 in the weeks ahead due, at least in part, to waning confidence in President Donald Trump’s ability to deliver promised tax cuts and deregulation to reinvigorate the US economy. Another reason is an expected slowdown in interest-rate hikes by the Federal Reserve.

Export-reliant firms like carmakers and engineering companies are sure to feel the squeeze from the euro’s strength, so corporate earnings are likely to suffer and weigh on stock prices, analysts said. Markus Reinwand, a stock market analyst at Helaba, a German regional bank, suggested many corporate earnings forecasts were exaggerated. “Stocks have moved too far away from the fundamentals,” he said. In both the DAX and the Euro STOXX 50 (which includes 50 blue chips in the euro zone), more earnings forecasts had been lowered than raised recently, he said.

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