By Herbert Rude
FRANKFURT (Dow Jones)–The environment for the stock markets is likely to remain difficult for the time being. Even if so-called Brenmarkt rallies are possible at any time after the recent price slide of 1,700 points; the prospects for a general trend reversal to the upside remain poor. On the one hand, this would require an end to what HSBC Trinkaus calls the “unprecedented drop in prices” on the bond market. On the other hand, market participants would have to gain confidence that the central banks would not send the global economy into a deeper recession by raising interest rates too much.
Both likely require a tweak in inflation expectations. And that’s not in sight at first. With the exception of energy and some foodstuffs, commodity prices are falling across the board. Nevertheless, inflation expectations threaten to solidify. At Commerzbank, it is said that labor costs in Europe are likely to rise more rapidly across the board – which will drive up the prices for services in particular, but also for goods. The core inflation, which is still rising in the euro area, means that inflation will only fall very hesitantly in the second half of the year, even if energy prices do not rise any further: “Even in the fourth quarter, there could still be a seven in front of the decimal point for inflation,” according to the economists at Commerzbank.
In addition, rationing of gas sales to industry after a Russian supply freeze is still hanging over the market like the sword of Damocles. Coupled with rising labor costs and a further slowdown in growth, shutdowns in industry are likely to weigh heavily on profit estimates.
The rating is still favorable – and the mood is already bad
So the risks remain high. Nevertheless, the chances of a short-term stabilization are not bad if there is no halt in gas supplies. The valuation is still favourable: after the recent slide, the price-earnings ratio in the DAX is only around 11 and thus well below the long-term average. The situation is similar in the Euro Stoxx 50. In addition, the stock markets are now heavily oversold. And in the US, there hasn’t been a significant Brenmarkt rally since the start of the bear market, so the start of one wouldn’t come as a surprise given the already very poor market sentiment.
The most recent sentiment survey by the American Association of Individual Investors (AAII) shows an extremely high share of bears among US private investors at 58.3 percent. “That’s about double the historical average,” said HSBC market analyst Jrg Scherer. In this he initially sees a glimmer of hope for the markets. However, he also warns that a reunion with the low for the year at 12,439 points remains an “equally threatening and realistic scenario”.
New German inflation data will only be available next week. Price data does come from the UK and Japan, but it relates to May. Overall, the agenda for the coming week is comparatively empty, as is usually the case in the week after a US central bank meeting. The focus will initially be on the purchasing manager indices on Thursday. They may have fallen slightly, but are still well above the 50 mark. The ifo business climate index will then be published on Friday; it is also expected to have fallen somewhat.
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DJG/hru/raz
(END) Dow Jones Newswires
June 17, 2022 05:48 ET (09:48 GMT)