Weekly outlook: 'Bright start to a challenging September' - German analyst perspective
Thanks to an impressive final sprint, the stock market successfully navigated the often challenging August, which in recent years has seen losses. The focus for the first week of September will be on the US labor market data released on Friday.
September 2, 2024 Frankfurt (Börse Frankfurt)
A few weeks ago, who would have thought? The stock market came under significant pressure at the beginning of August, but DAX still reached an all-time high at the end of last month. This all-time high is valid until further notice and is approximately 18,971 points. Therefore, the difference between the low and high in August was almost 2,000 points. On Monday morning, the German stock index rose from Friday's closing price of 18,906 points to 18,915 points (weekly balance: +1.5%). The major US stock indices, S&P 500 and Nasdaq 100, turned positive in the last two hours of trading on Friday, providing generally positive guidance for the week ahead. However, the results of the state elections in Saxony and Thuringia are seen as potential negative factors.
The analysts at Helaba cite the so-called "Goldilocks scenario" as the reason for the recent strong performance of the stock market. This refers to the combination of a slow but steady global economic growth, a decrease in inflation rates, and the beginning of an interest rate cut cycle in monetary policy. The strategists state that "this has already been celebrated in the stock market". On the other hand, there is a phenomenon known as seasonality, and on average, the performance of the DAX in September is relatively poor. According to a Weltenreiter Invest editor, the profit-taking in the stock market last weekend may have been due to this phenomenon.
This September is likely to be dominated by central banks. Both the ECB and the Federal Reserve are highly likely to lower key interest rates at their mid-September meetings. Given the recent statements from both central banks and the decrease in inflation rates last week, any other announcement would be a big surprise. As emphasized by LBBW, a decrease in interest rates is fundamentally positive for the stock market. This is because analysts assume a "higher present value" when discounting future cash flows of companies.
Interest rate cuts often do not initially become a factor that causes price increases.
At the same time, experts point out that the worsening economic situation as a "true reason for the switch in key interest rates" raises concerns about decreasing cash flows. In addition, the past has shown that "during the initial phase of a key interest rate cut, the stock market tends to decline rather than rise". LBBW also warns that Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia, known as the Big 6, are gradually losing popularity among investors as they are seen as the leading actors in the wave of AI and the bullish market. These stocks, which rose significantly in the first quarter, averaged a decline in the second quarter. "The fact that Nvidia, the darling of AI, was under-sold in the stock market despite surpassing high expectations, fits this pattern," says an analyst.
On the other hand, economists at Commerzbank emphasize that the general market sentiment remains "unstable". Therefore, if sentiment indicators disappoint expectations, it could quickly weigh heavily on investor sentiment. The US labor market report, which will be released next Friday, is considered the most important announcement of this week. The chances of a significant increase in stock prices ahead of this report are considered "low".
Technical analysis: Target stock price of 20,000 points.
In technical analysis, the target stock price is 20,000 points.
From a technical perspective, the DAX has reached a new all-time high and left behind all major resistance levels for the time being. According to HSBC's Jörk Scheller, from a purely mathematical point of view, the temporary weakness in August is now leading to a long-term price target of 20,000 points. The significance of this round target is further supported by the Fibonacci projection of 161.8% of the entire correction of the DAX from mid-May to early August (20,047 points). In the downtrend, the neckline of the "V-shaped reversal" at 18,564 points is particularly important.
Important economic, business, and event for this week
September 2nd (Monday)
Labor Day in the USA: Market closed
September 3rd (Tuesday)
4:00 PM US ISM Manufacturing PMI: In the data for July, this index was at 46.8 points, triggering a significant drop in the US market. According to Deka, the regional surveys for August indicate a slight increase in the ISM index to 47.5 points.
September 4th (Wednesday)
Germany Index Review: The regular review of the German exchanges takes place four times a year on the 3rd business day of March, June, September, and December. The determined changes are announced after the close of the US exchanges and take effect approximately three weeks later.
September 5th (Thursday)
8:00 AM Germany New Industrial Orders: According to Helaba, this figure is unlikely to brighten the mood in Germany. However, very few people are expecting this at the moment. Specifically, economists are expecting orders to decrease by 1.5% compared to the previous month. The consensus forecast is for a 2.0% decrease.
4:00 PM. USA ISM Service Index: Heraba's strategist expects the abnormally volatile August ISM index to remain in the "expansion zone" (50 points or more). According to experts, this index temporarily fell into the recession zone during serious hurricanes, like the last two, making it a surprising sign and an indicator of a strong US economy. Specifically, 50.5 points are expected, but the consensus forecast is 50.9 points.
8:00 AM Germany Industrial Production: With the relevant items in the Ifo business climate index and the Purchasing Managers' Index showing sluggish trends, Commerzbank's strategist expects both new orders (Thursday release, forecast: -1.0% compared to the previous month) and production (same -0.5%) to be weak.
2:30 PM USA Labor Market Report: According to Commerzbank, it is necessary to consider the impact of Hurricane "Beryl" and the increase in employment demand, as the unemployment rate, which rose to 4.3% a few years ago, will not worsen further in August. Economists suggest that employees who were excluded from the statistics due to the hurricane are returning to work, so the number of employees is likely to increase by 0.15 million, with a high possibility of further increases.
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