Although the well-known crises have not disappeared, their impact on the capital markets has evidently lost dramatically. Fears of inflation and interest rates are easing, and the feared world recession seems to be absent. Is it just the low expectations that are behind the course fireworks? Or are the markets showing justifiably positive foresight?

After completing the zero-Covid strategy, China is likely to pass its infection peak at the end of January – shortly after the Chinese New Year celebrations. This will be followed by an economic comeback, which will be boosted by monetary and fiscal policy pick-me-ups.

Robert Halver heads capital market analysis at Baader Bank.

On the raw material markets, the sharp increase in copper prices – 10 percent since the beginning of the year – already anticipates the Chinese economic recovery, which will then spread throughout the world economy.

Specifically, Beijing is working intensively to stabilize the ailing real estate sector, which is of crucial economic importance. Easing of the financial restrictions that have been in force since August 2020 should ease the situation for real estate developers. And the KP knows: If the Chinese no longer have to fear for their old-age provision, which is largely based on real estate, this will also have a positive impact on their willingness to spend via a positive wealth effect.

Overall, the Chinese credit default premiums have already receded noticeably and have had an impact on the Chinese stock market.

The recovery effects of China as Asia’s central star should also benefit the equity markets of the Asian emerging countries. In view of the gap in prices compared to the stock markets of the industrialized countries that has arisen since 2021, they have some catching up to do.

And last but not least, the European export nations, especially Germany, and their cyclical stocks will benefit from China’s relevance for the global economy. Even if it initially remains at the bottom of the global economy in view of structural deficits and a little market-based economic policy, the clearly brightened leading indicators suggest that the euro economy is just scraping past a winter recession.

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In concrete terms, European companies are benefiting from the increasingly better availability of primary products for their industrial and export-related business models, while at the same time sales markets around the world are open again and are more demanding.

In addition, the chalice of an acute gas crisis passes us by as a heavy growth mortgage. The less European gas storage facilities are emptied due to mild weather or the prospect of LNG terminals, the lower the need for refilling next summer. However, if the Chinese economy picks up again, prices could rise again. In return, intact supply chains ensure relaxation.

In fact, according to the Economic Surprise Index compiled by Citigroup – which measures the deviation of published economic data from the previously made analyst estimates – the economy in the euro zone has recently been able to surprise significantly more than the American economy. On the stock markets, this surprise is expressed in the noticeable outperformance of stocks in the euro zone compared to their American competitors. Who would have thought it would be 2022? Cyclical equity Europe is back!

In addition to the fundamental considerations, the interest rate policy also has a positive effect on the stock markets. Because according to the Citigroup Inflation Surprise Index – which measures the deviation of actual inflation from analysts’ estimates – international price reductions are greater than expected.

In the USA in particular, frictional losses in the economy are alleviating the price pressure on the demand side. According to the Institute of Supply Management (ISM), the downturn in industry is now accompanied by clear signs of slowing down among service providers.

The pricing power of companies is waning accordingly. For example, the National Federation of Independent Business survey shows that the proportion of small businesses looking to raise prices is falling rapidly, partly to reflect lower growth prospects and high inventories. In fact, the price cooling is reflected in the sixth decline in US inflation – currently to 6.5 percent after 7.1 percent previously – noticeable.

Slowing US wage growth also reduces the risk of second-round effects via a wage-price spiral. Overall, with a view to the economy and inflation, the Fed will not overstretch the monetary policy arc. To do this, it will limit its remaining rate hikes to 25 basis points, not 50 basis points.

Easing interest rate hike pressures in the US is supporting the euro, which appears to be rising like a phoenix from the ashes. In addition, inflows into economically sensitive stocks in the euro zone and a currently less opulent economic environment in America are supporting the common currency.

However, the further appreciation potential of the euro is fundamentally limited, since apart from economic catch-up effects there is a lack of clear (economic) political follow-up impulses and the ECB is likely to announce the end of the interest rate turnaround in Europe in view of the calming of inflation.

Due to low expectations, the stock exchanges reacted particularly euphorically to the positive inflation and China prospects. Despite the January effect, the markets will still not show a breakthrough until interest rate hope is replaced by reality. At the same time, after the friendly leading indicators, investors want more hard facts about the economy.

Therefore, the investment strategy will first be documented in a bargain hunt. At the same time, cyclical value stocks remain fundamentally interesting.

In the further course of the year, however, when a mild monetary policy and a stable global economy increasingly materialize, equities will strengthen over the long term. Then the tech stocks, which have recently fallen out of favor, should also be given attention again, which have great price leverage due to massive losses and less interest charges and, after the upcoming reporting season for the fourth quarter of 2022, are starting the new year with realistic but sustainable profit expectations.

Zacks Investment Research initially expects a mid-single-digit contraction in the US reporting season. But in perspective, profits will work their way back into the growth area in the second half of 2023.

High-quality corporate bonds are suitable for risk diversification during the transitional period. They have attractive interest rates that are on average above the dividend yield of the DAX and Euro Stoxx 50. And if there is a turning point in the interest rate turnaround by the central banks and earnings are strengthened via an economic revival, price increases polish up the potential for returns even further.

From a sentiment point of view, the friendly start to the year on the stock exchanges speaks for more risk appetite. The fear of not being there (fomo = fear of missing out) is attracting more and more investors. In the short term, however, Fear has rapidly turned from fear to greed

In terms of charts, the next resistances on the way up are 15,095, 15,200 and 15,338 points. If there is a consolidation, the 14,950, 14,895 and 14,816 levels offer support. Below this are further supports at 14,775, 14,676 and 14,570 points.

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