DAX beats: That’s why the stock markets are rushing down

DAX gets beaten
That’s why the stock markets are falling

Jan Ganger

The mood on the stock markets is gloomy, prices are falling. It looks like it won’t change anytime soon. Central banks may be forced to raise interest rates more than is healthy for the economy.

Stock exchanges continue to fall. After Wall Street had its worst day since the corona pandemic outbreak yesterday, markets in Asia and Europe are following in their footsteps. Expressed in numbers: in Frankfurt, the DAX lost more than 2 percent to around 13,700 points, while the STOXX 600, which includes the most important European stocks, fell by almost 2 percent. In Tokyo, the Nikkei lost 2 percent, the Hong Kong stock exchange closed by 2.6 percent. lower. Thanks to the easing of the Chinese crown, the Shanghai Stock Exchange was doing relatively well and was only 0.1 percent. lower.

The leading US index, the Dow Jones Industrial, was down 3.6 percent earlier. The market-wide S&P 500 index fell by as much as 4 percent. – this is the highest daily loss since June 2020. The situation was even worse for the technologically advanced Nasdaq 100, which fell by 5%. Since the beginning of the year, the DAX has lost over 14 percent, the S&P 500 has lost about 18 percent, and the Nasdaq 100 has even lost almost 28 percent. The question is: what is really going on on the stock exchanges?

The fear of stagflation, the poisonous mixture of high inflation and a weakening economy, is gone.

Background: The US and Europe are currently plagued by unusually high inflation – fueled by high energy prices and disrupted supply chains. Therefore, the US Federal Reserve announced the end of its ultra-loose monetary policy and raised interest rates significantly. Fed chairman Jerome Powell prepares the markets for further aggressive interest rate movements. In the face of weak growth in the euro area, the European Central Bank has so far consistently refused to raise interest rates that have long been negative. But now central bankers are clearly signaling that this will change in July.

“Bad news”

Stock exchanges tend to react to higher interest rates with falling prices. Because this makes the investment alternatives that earn interest more attractive. In addition, higher interest rates tend to weaken the economy and thus obscure corporate earnings prospects. This is especially true of heavily indebted tech companies, which are particularly suffering from rising interest rates.

At the moment, the situation is even worse. Fear in the markets: To control high inflation, central banks may be forced to raise interest rates so significantly that the economy will slide into recession – that is, in a phase of economic contraction and high inflation.

High inflation itself causes price losses. The latest data from the US, UK and Canada suggest that inflation will remain high for longer than originally expected, says investment strategist Michael Hewson of brokerage firm CMC Markets. “This is bad news for consumers, profit margins and growth.”

Mechanism: In addition to higher interest rates, rising prices also result in lower consumption. Consumers can no longer or no longer want to afford certain products which have become much more expensive. This reduces the profits of companies that also find it increasingly difficult to pass on increases in costs – such as wages, transportation, materials and energy – onto their customers.

Retailers are becoming increasingly pessimistic

For example, US retailers are currently spoiling the mood in stock markets because they are monetizing their forecasts. After Walmart on Tuesday, it was Target’s turn. Its shares fell to their lowest level since November 2020 and the market value fell by a quarter. The retailer pointed to a significant increase in costs, which means that it will probably be less profitable this year than initially announced.

Against this background, especially interesting in the afternoon should be the fresh economic data from the US, from which investors hope to draw conclusions about the pace of expected interest rate hikes by the Fed. The schedule includes the economic barometer of the Federal Reserve Bank of Philadelphia, which is forecast to decline in May.

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