The financial markets are debating whether a US recession can still be avoided at all. After all, the Fed President himself does not shy away from economic downturns if they help to break the neck of inflation. In Europe, the energy crisis is the greatest economic risk. For the time being, recession worries will not allow any lasting relaxation on the stock markets.
Global industrial sentiment is well past its peak. The increasing fears about the economy are also reflected in the industrial metals markets, which have fallen by around 25 percent since the beginning of March due to fears of falling demand.
Even the so-praised US economy is no longer in good standing. The industrial mood is increasingly crumbling and has devastating consequences on the stock market. Only in 1932, at the time of the Great Depression, did the American stock market lose 45 percent in the first half of the year, even more than in 2022.
US consumer expectations, which are at their lowest level since 1980, also show that the cracks in the foundation of the US economy are getting deeper. “Street research”, the observation of everyday developments, also confirms this assessment. The Restaurant Performance Index signals a growing minor mood. In line with sales expectations, Americans’ propensity to eat out is declining.
In addition, the massive increase in the average interest rate for a 30-year mortgage has left its mark on the US real estate market, which is of great importance for the domestic economy.
After an economic contraction in the first quarter and after a stagnation forecast by the Atlanta Fed for the current quarter, it is becoming increasingly difficult for the US economy to achieve a soft landing. The US Federal Reserve’s other major rate hikes are having a restrictive effect.
The economy in the euro zone is already suffering in three ways: for its industrial and export-related business models, there is a lack of preliminary products, which have also become more expensive. And the global sales markets are characterized by cautious demand anyway. As a result, corporate sentiment will continue to fall.
And now an energy crisis is added as another serious handicap. Due to significantly restricted Russian gas supplies, Federal Minister of Economics Habeck has issued the second of three warning levels of the “Gas Emergency Plan”. It seems only a matter of time before gas price increases hit consumers and industry hard. And who knows what Moscow’s tit-for-tat for the Lithuanian railway blockade to the Russian enclave of Kaliningrad will look like. Another fictitious “technical” reason for another delivery cut is possible. To what extent will gas supply to Europe resume after the annual maintenance of the Nord Stream 1 pipeline in the summer?
Against this background, even the extensive backlog of orders in German industry cannot cause any fundamental joy at the moment. Theoretically, they are sufficient to keep the companies producing for almost 12 months. However, due to a lack of energy raw materials and preliminary products, they cannot be processed in practice. And unfortunately there is currently no light at the end of the tunnel.
Admittedly, there is still no immediate threat of a collapse in the gas supply. But it is currently not possible to fill the gas storage tanks sufficiently. In the worst case, there is a threat of gas rationing and production losses in industry, which will further fuel the recession.
Small and medium-sized German companies, which cannot diversify energy sources and sales markets worldwide like large corporations, have been hit particularly hard. In fact, Germany’s large international industry is benefiting from the price discounts on oil and gas that Putin is granting to China and India, among others.
A split in the energy world into a northern part consisting of America – where the need for record-high petrol prices is alleviated by tax suspensions over the driving season – and Europe and a southern part consisting of China, India and other emerging countries with Russia as a major energy supplier can no longer be ruled out. Western moral issues do not seem to play a major role in many aspiring nations anyway, given their thirst for energy and the lower Russian commodity prices. This is because they gain competitiveness compared to classic industrialized countries, which cannot benefit from their know-how without an adequate supply of raw materials.
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The emerging countries of Latin America in particular have clearly outperformed the industrialized countries since the beginning of the year due to their economic distance to the trouble spot Ukraine, but above all due to their raw material deposits. However, the recession fears expressed in falling commodity prices also show countries like Brazil the limits of happiness.
The emerging countries of Asia with their central star China are suffering similarly high losses as the established world stock exchanges. The growth potential of tech companies in particular will continue to be curtailed by Beijing’s regulatory stranglehold. Announcements by the KP, Alibaba, Baidu
Fears of recession, interest rates, inflation and war, sudden spikes in volatility and the increasing entry of the stock markets into the bear market are sticking to the stock exchanges like chewing gum to a shoe. Markets will remain nervous until there is more clarity on inflation, monetary policy, and economic and corporate earnings trends.
After all, fears about the economy are limiting the topic of fear of interest rates. As an economic barometer, the falling copper-gold ratio signals a weakening of the economic upswing. This suggests that inflation will gradually peak in the summer. The Fed’s policy of radical interest rate hikes, which is intended to pull the rug out of inflation this year if possible, also fits in with this. In 2023, the fear of interest rates would therefore subside significantly. An easing of the price pressure should ultimately be reflected in a stabilization of the yields on 10-year US government bonds, which have already risen sharply in historical comparison.
The upcoming US reporting season for the second quarter of 2022 will probably develop into a mood brake. There are signs of a significant slowdown in the hitherto euphoric earnings growth. According to Zacks Investment Research estimates, growth is set to settle in the mid-single digits. The outlook focuses on the extent to which the increasing cost pressure on the raw materials side can be slowed down by decreasing corona risks.
The stock exchanges are currently paying attention to those companies that can at least partially pass on price increases or successfully outmaneuver delivery bottlenecks and that suffer less from fear of a recession. Defensive stocks – health care, infrastructure, basic consumption – and alternative energy stocks, which are massively supported by politicians, are in the lead here. Investors with a long-term perspective should, however, look at economic stocks that now have great leverage due to massive price losses from geopolitical and global economic easing. Much is already priced in.
From a sentiment perspective, the recent massive sell-offs in equities are clearly showing signs of “capitulation”. In addition, there is now the strongest speculation by hedge funds on falling share prices (so-called short sales) since the Lehman bankruptcy, especially in Europe. Whether this is the final sell-off that typically marks the end of a down move remains to be seen. For the time being, sustained recovery rallies on the stock exchanges remain weak apart from interim recoveries.
the fear
According to a Bank of America survey of fund managers, pessimism about the global economy has reached another all-time high, keeping cash holdings high. So there is a lot of money waiting on the sidelines, which dares to return to the stock markets immediately when the prospects brighten and ensures a price stabilization.
The condition, however, is that the various trouble spots cool down. Until then, stock and bond markets will have to reckon with increased price fluctuations.
In terms of charts, the first supports in the DAX are on the way down at 12,831 and 12,746 points. Further down moves lead to the hold lines at 12,746, 12,646 and 12,439. In case of a countermove to the upside, the first resistances lie at 13.008, 13.035, 13.125 and 13.225. If they are exceeded, the next barriers are 13,444 and 13,810 points.
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