Stock markets

The fat years are over

  Since 2014, the German finance ministers have always been able to report budget surpluses. Over the past six years, the total federal budget has accumulated more than 200 billion euros, which could be used to pay off debts or flowed into the reserves for overcoming the refugee crisis. But this is now over, as the current tax estimate makes clear at the latest. This year alone, the national budget will be short of around 100 billion euros in tax revenues compared with the forecasts from the pre-Corona period. At the same time, there will be high additional expenditures for crisis management. So in 2020 Germany will have high deficits at all levels of government and will probably have to incur significantly more new debt in just one year than it was able to save up in the six years before. The new debts are unavoidable and no attempt should…

Back to normality

In the industrialized countries, the corona pandemic is gradually stabilizing and developing in a relatively orderly fashion. In Germany, this easing of the infection figures has led to a real boost in easing measures. However, this discussion is not only taking place in Germany; in all countries there is increasing pressure to relax the rigid lock-down measures and to give people more freedom again. In the end, these new freedoms are not reflected in the financial markets. Here, the planned easing and the restarting of the economies have already been priced in over the past few weeks. However, the easing of the monetary policy also raises concerns about a second wave of contagion. If this were to be too strong, it could also lead to renewed – hopefully targeted – restrictions in economic and private life. Accordingly, the price fireworks have come to an end for the time being. In…

US banks shy away from risk

  US banks are becoming much more restrictive in their lending. This is shown by the latest results of the US Federal Reserve’s quarterly Senior Loan Officer Survey among banks. Should there be a wave of insolvencies, the economic recovery is likely to be very sluggish. For that reason, the US Federal Reserve is currently trying to secure the supply of credit almost single-handedly. The standards for commercial loans as well as for loans to private households have tightened dramatically in the wake of the COVID 19 crisis. In the business subcategory, respondents reported that, on balance, credit conditions have been tightened considerably for both large and medium-sized and small firms. In addition, margins for riskier loans have risen sharply and the requirements for collateral have increased considerably. The main reason cited by the credit institutions for the significant tightening of the granting of corporate loans was lower risk tolerance….

Flash estimate of gross domestic product – Euro zone economy continues to decline unabated

The economic consequences of the corona epidemic in Europe are now reflected in the hard data, exceeding even the worst fears. In the first quarter of 2020, economic output in the euro zone fell by 3.8 percent compared with the previous quarter. There has never been such a sharp decline in the history of the euro area. The figures from the countries that have also already presented an initial calculation for the losses in the first quarter are also sobering. Economic output has fallen in all countries, and more than significantly so. The declines from the financial crisis of 2008/2009 were easily undercut. In France, gross domestic product fell by 5.8 percent, in Spain by 5.2 percent, in Italy by 4.7 percent, in Belgium by 3.5 percent and in Austria by 2.5 percent. Based on the data now available on EMU and the major countries, it can also be assumed…

The stock markets are very expensive – a problem?

We are in a time of extremes. We will have the worst recession in the post-war period, accompanied by the fastest stock market correction. This was followed by the strictest quarantine measures, as well as the fastest and most extensive aid packages from central banks and governments. Now we can observe the fastest recovery movement on the markets. After the market lost around 40% of its capitalization in less than 30 days, the DAX and S&P 500 have gained over 30% in the last 40 days. Although prices are trading below their old highs, valuations are shooting through the roof as profits and profit expectations are falling sharply. Since the high in February, earnings estimates for 2020 have already been reduced by more than 20% and this trend should continue. The S&P 500 is trading at a P/E ratio of 19.2 – the highest since 2002. The DAX P/E ratio…

Everything has its price

The global economy is in a deep crisis. To prevent worse from happening, central banks are cutting interest rates and providing sufficient liquidity, while governments are supporting the real economy with guarantees, loans and government investments. Both have worked extremely well so far. Like everything in life, this has its price. The central banks provide for very low or negative interest rates. Not just now, but probably in the years to come. Corporate bond prices have lost any signalling effect as central banks subsidise the market by buying bonds. In addition, because of the central banks‘ boundless willingness to take risks, liquidity can easily work its way through the markets and lift bond and equity prices upwards. In addition to the positive short-term effects, however, government measures also have medium and long-term consequences that become increasingly negative over time. On the one hand, there is likely to be a crowding-out…

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