Weekly outlook: "Strong nerves are currently required"

Weak economic and labor market data, a so far only mediocre reporting season and the unwinding of carry trades are putting pressure on the stock markets. Chart technicians are warning of further losses in the coming weeks.
 

5 August 2024. FRANKFURT (Börse Frankfurt).At the start of what is historically a difficult time of year, the stock markets have once again stepped up the pace of their correction. In the USA, the S&P 500 and the Nasdaq 100 suffered their third consecutive week of falling prices. The DAX, which had been able to recover somewhat in the previous week, lost a disproportionately large amount of value this time. Closing at 17,661 points, it was down 4.1% for the week. Following equally weak data from Asia, the German share index is again under pressure at the start of the new week. Pre-market estimates put the DAX below 17,300 points.

Corporate profits at risk

And this in an environment of significantly lower bond yields and increasing hopes of interest rate cuts. At the moment, however, this is only playing a subordinate role on the stock markets. The focus is on other issues. In LBBW's opinion, the combination of weakening economic momentum worldwide, probably exaggerated AI-induced profit expectations and problems in dealing with China could result in downward revisions to company profits in the long term.

The analysts sense major problems for the tech giants in particular: "The flagging of the driving forces points to an imminent consolidation on the global stock markets". The strategists also point to the current valuation of the US stock markets. Only on 17 percent of all days in the past ten years has the S&P 500 been more expensive than it currently is. "In order to return to neutral valuation levels, we would therefore need a consolidation or, alternatively, a significant rise in index gains". In LBBW's view, however, the latter is difficult to achieve because analysts are likely to take a more realistic and therefore less euphoric view of the US tech giants' earnings expectations in future.

"Turbulence inevitable"

International hedge funds in particular are currently expected to act as sellers. Volker Schulz from Bernecker Börsenbriefe, for example, takes this view. The experienced financial journalist speaks of "massive liquidations of leveraged carry trades" following the key interest rate hike in Japan and the subsequent significant fall in the dollar/yen exchange rate. According to this, hedge funds borrowed in yen at favorable conditions for a long time and then invested the borrowed money in the dollar zone, where they were able to profit from the significantly higher interest rates and rising share prices. Schulz assumes that "significant capital has also flowed into Big Tech in this way". The appreciation of the Japanese yen has now thrown a spanner in the works. If the carry trade volume, estimated at around 20 trillion dollars, is now partially unwound, turbulence is inevitable.

The analysts at Helaba also believe that a sustained correction in technology stocks is likely. Therefore, strong nerves are currently required. However, such a scenario would generally prevent the markets from overheating and thus help to stabilize the upward trend overall. All in all, the analysts therefore remain confident. The Helaba BEST indicator for the DAX, which was developed for strategic timing, is currently in the "hold" range. As the DAX is fluctuating around its fair value, the German share index has "potential for a higher valuation" over the coming months. However, this would require a brightening of economic sentiment. 

Technical picture shows "numerous new sell signals"

Technical analyst Marcel Mußler describes the end of the past week as a "disaster for the stock markets". Some markets were "literally torn apart", which led to "numerous new sell signals". Although the first signs of stabilization and attempts at recovery are possible in the new week, this should not be interpreted as a "new start". With regard to the DAX, Mußler points to the "major support" at 17,626 points, which was already reached on Friday. In the event of a lower breakout, the next alternative target would be the 2022 upward trend, currently at 17,070 points. The chart technicians at HSBC see the old highs at 17,003 and, above all, 16,529 and 16,290 points as further potential starting points in the event of an extended correction.

Important economic and business events of the week

Monday, 5 August 

10.30 am. Eurozone: Sentix economic index. According to Deka, the first sentiment test in August is likely to be negative. Economists point to the unchanged political challenges and disappointing economic indicators as reasons for this. The overall index is therefore expected to come in at minus 8.0 points. The consensus estimate is minus 5.9 points. 

2.30 pm. USA: ISM Services Index. For the analysts at Commerzbank, the ISM index figures are one of the most important news items of the week. It is also a potential source of hope, as a significant improvement above the growth threshold of 50 points is expected. As services play a very important role in the very service-heavy US economy, the emerging fears of a recession could be contained again. The consensus forecast is for a value of 51.3

Tuesday, 6 August 

8.00 am. Germany: Industrial orders. After weak May figures put a significant damper on hopes of an economic upturn, the June data could paint a positive picture with an increase of 1.5 percent, according to Commerzbank. However, this would be due to special effects. The "hard" data should therefore reveal unchanged weakness in German industry.

Wednesday, 7 August 

8.00 am. Germany: Industrial production. Economists expect a slight increase of 1.0% on average compared to the previous month. Compared to last year, however, this would still mean a sharp drop of 3.8 percent.

Thursday, 8 August 

2:30 pm. USA: Initial claims for unemployment insurance. In the weekly data, Deka estimates a figure of 249,000 applications this time. Last week, the number of applications also rose to 249,000 on a seasonally adjusted basis, which was higher than expected.

Friday, 9 August 

No relevant data releases

From Thomas Koch, 5 August 2024, © Deutsche Börse AG