Weekly Outlook “Strong Nerves Needed: A German Analyst's Perspective

Sluggish economic/labor market data, a mediocre reporting season so far, and a rebound in carry trade are putting pressure on the stock market. Chart technicians have warned that there will be further declines in the coming weeks.

2024/8/5 Frankfurt (Stock Exchange)

At the beginning of a historically difficult period, the stock market is once again strengthening its pace of adjustment. In the US, the S&P 500 and Nasdaq 100 experienced three consecutive weeks of decline. DAX had recovered slightly the previous week, but this time the price dropped disproportionately large. The closing price was 17,661 points, down 4.1% on a weekly basis. Following similarly weak data from Asia, the German stock index is once again under pressure at the start of a new week. According to market expectations, DAX is below 17,300 points.

This is in an environment where bond yields have declined drastically and expectations for interest rate cuts are rising. So far, however, this issue only plays a subordinate role in the stock market. The focus is on other issues. According to LBBW's opinion, weakening global economic momentum, probably exaggerated profit expectations due to AI, and issues dealing with China overlap, and there is a possibility that corporate profits will be revised downward in the long run.

Analysts feel a major problem, particularly for tech giants: “The stagnation of momentum suggests that consolidation of global stock markets is imminent.” The strategist also points out the current valuation of the US stock market. In the past 10 years, there were only 17% of the total days when the S&P 500 stock price index was more expensive than it is now. “In order to return to a neutral valuation level, either an adjustment in stock prices or a significant increase in the index is necessary.” However, according to LBBW's opinion, there is a high possibility that analysts will have a more realistic, or less euphoric, view the earnings forecasts of major US high-tech companies in the future, so it is difficult to achieve the latter.

Currently, it is expected that international hedge funds in particular will turn to sellers. For example, Volker Schulz from the Bernecker Belsenbrief looks at it this way. This experienced financial journalist talks about “large-scale liquidation of carry trades with leverage applied” in response to Japan's major interest rate hikes and the subsequent drastic decline in the dollar-yen exchange rate. According to that, it is said that hedge funds borrowed yen on favorable terms over a long period of time, managed the borrowed funds in the dollar area, and obtained profits from drastic interest rate increases and stock price increases. Schultz speculates that “large amounts of capital have flowed into Big Tech in this way.” However, the appreciation of the yen threw a stone into this problem. If the carry trade, which is said to be around 20 trillion dollars, is partially resolved, turbulence is inevitable.

Also, Helaba analysts see that a sustained adjustment in technology stocks is possible. Therefore, strong nerves are necessary at this time. However, such a scenario would generally help prevent market overheating and stabilize the overall uptrend. As a result, analysts remain confident. DAX's Helaba BEST index developed for strategic timing is currently in the “hold” range. Since DAX is fluctuating around fair value, there is a “possibility that the valuation” of the German stock index will rise over the next few months. However, in order to do so, it is necessary for economic sentiment to brighten up.

Technical analyst Marcel Moosler described last weekend as a “catastrophe for the stock market.” Several markets were “literally torn apart,” leading to “numerous new selling signals.” The new week shows signs of stabilization and attempts at recovery, but this should not be interpreted as a “fresh start.” Regarding DAX, Müßler points out “major support” of 17,626 points. If it falls below this, the next target will be the 2022 uptrend, which is currently at 17,070 points. HSBC chart technicians see the old high of 17,003, and above all 16,529 and 16,290 points, as a further starting point when adjustments expand.

Monday, August 5

10:30 a.m. Eurozone: Sentix economic indicators. According to Deka, the first sentiment test in August is likely to be negative. Economists point out unchanging political issues and disappointing economic indicators as reasons. Therefore, the composite index is expected to be minus 8.0 points. The consensus forecast was minus 5.9 points.

2:30 p.m. America: ISM Service Index For analysts at Commerzbank, the ISM Index is one of the most important news of the week. Also, since it is expected to significantly exceed 50 points, which is the standard growth rate, there is a possibility that it will be a source of hope. In the US economy, where there are so many service industries, the service industry plays a very important role, so even if concerns about a recession surface, there is a possibility that they will subside again. According to the consensus forecast, it is 51.3.

August 6 (Tue)

8:00 a.m. German Industrial Order Received. According to Commerzbank, there is a possibility that the June data will turn positive with a 1.5% increase after the weak May figures greatly affected expectations for economic recovery. However, this is due to special effects. Thus, “hard” data should reveal that German industry is still sluggish.

8/7 (Wed)

8:00 a.m. German Industrial Production. Economists expect a slight increase of 1.0% on average from the previous month. However, compared to last year, it is still a drastic decrease of 3.8%.

8/8 (Thursday)

2:30 p.m. America: New Unemployment Insurance Claims According to several weeks of data, Deka expects the current number of claims to be 0.24 million9,000. The number of applications last week was also seasonally adjusted and exceeded expectations at 0.249 million.

8/9 (Friday)

No related data announced