Analysis: DAX likely to be burdened by interest rate concerns for months to come

The leading German index, the DAX, got off to a surprisingly good start in the year, but asset manager Jens Ehrhardt from DJE Kapital had words of warning at a fund industry meeting in Mannheim recently: “We’re not out of the woods yet.” Due to the recently restrictive central bank policy in the USA and Europe, the headwind is still strong.

Thanks to the sharp fall in energy prices in recent months, the DAX was able to decouple itself somewhat from the recession worries in the USA and rose by a good twelve percent in the first quarter. Even the most recent bank quake has not dampened the good mood so far, although small financial institutions in the USA have stumbled or even collapsed and in Switzerland Credit Suisse (CS) had to be rescued by an emergency sale to its competitor UBS.

All of this brought back uncomfortable memories of the 2008 bankruptcy of US bank Lehman Brothers, which sent shock waves through the global financial system. However, experts such as “Wirtschaftswise” Ulrike Malmendier currently see no threat to financial market stability.

Carsten Roemheld, capital market strategist at asset manager Fidelity, also said in Mannheim: “We are far away from another financial crisis”. The banks on both sides of the Atlantic currently have very solid balance sheets overall, and in an emergency the mechanisms of politics and the central banks would take effect much more quickly than in the past.

Six important central banks reacted quickly to the most recent turbulence and stepped up the pace of supplying the financial system with dollar liquidity. US banks borrowed a record amount of short-term loans from their central bank, the Fed. Because the government bonds on the balance sheets of the financial institutions have lost value as a result of the turnaround in interest rates – this can become a problem if they have to sell the paper before the end of the due date.

But the more liquidity the central banks pump into the financial system to support the banks, the greater the risk that inflation, which has just eased off, will rise again.

Therefore, the crucial question is: How are the central banks reacting to the banking problems in view of the still high inflation, and what does that mean for the markets?

Portfolio manager Olgerd Eichler from Mainfirst was optimistic in Mannheim: “The Fed keeps the stability of the financial markets very high and, in case of doubt, takes priority over fighting inflation.” With this confidence behind you, the DAX could increase significantly and end the year at at least 16,300 points. That would be a record high.

The market, i.e. the majority of investors, is also currently expecting that the Fed could lower interest rates this year to ease the situation – possibly even in several steps.

However, many analysts and economists are still assuming that the key interest rates – as communicated by the US Federal Reserve – will initially remain at a high level in order to continue to defy inflation.

This in turn increases the risk of recession, because it is to be feared that in this case loan defaults will increase significantly, companies will invest less and private individuals will prefer to save than spend money or even go into debt in order to be able to consume more. Fidelity expert Roemheld does not believe that the European stock exchanges will be able to make any big leaps in the foreseeable future.

And even if the Fed, which sets the tone, were to lower interest rates slightly this year, according to DJE expert Ehrhardt, experience has shown that delay effects will ensure that monetary policy easing only has a positive impact on growth and thus on the stock markets after a considerable time lag.

Until then, according to Ehrhardt, the negative effects of the turnaround in interest rates should still dampen economic activity, so that the DAX could fall back to its low of almost 12,000 points reached in autumn 2022 over the course of the year.

Investment strategist Ulrich Urbahn from the private bank Berenberg predicted at least a tough phase on the stock market, which could extend into autumn. Because “the relative attractiveness of bonds compared to stocks has increased with the rise in interest rates” – and should encourage pension funds and insurance companies in particular to reduce stocks and increase bonds. As a result, the upside potential of equities is likely to be clearly limited for the time being. Only the traditional year-end rally on the stock exchanges could then raise the DAX to 16,200 points.

/la/jkr/mis

— By Lutz Alexander, dpa-AFX —

FRANKFURT (dpa-AFX)

Image sources: Julian Mezger for Finanz Verlag

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