As expected, trading was volatile. Friday was at least a slight recovery in the stock market index after losing around 23 percent in the past week.
The initial optimism among investors was overshadowed by the plans of the US president. According to circles, he wants to declare a national emergency due to the coronavirus outbreak, as the Bloomberg news agency reports.
He said he would rely on the Stafford Act to provide more federal aid to states and communities, as two people familiar with the matter said. The President announced a press conference for 3 p.m. Washington time (8 p.m. CET).
The Fed had recently announced that it would accelerate its planned purchases of government bonds to ease the pressure on the markets. She plans to buy $ 60 billion in government bonds next month.
The global stock markets crashed yesterday, Thursday, the Dax lost 12.2 percent and fell below the 10,000 point mark for the first time since 2016. In the end, he recorded 9161 points. This is the second largest daily loss in the history of the Dax.
A historical comparison shows: On October 16, 1989, the minus was 12.8 percent. However, the Dax only lost 203 points at the time because it was only 1385 points.
On Wall Street, investors can take a breath this Friday. The Dow Jones opened up 4.7 percent, but later the profits crumbled again.
The corona virus crisis is having an increasingly negative impact on the US economy: US consumer sentiment deteriorated significantly in March in view of the pandemic and falling share prices. The consumer confidence bar fell 5.1 to 95.9 points, the University of Michigan said on Friday’s monthly survey.
In addition, the data indicated that further losses of trust could be expected, the university said. Because the virus continues to spread. Private consumption is the most important pillar of the US economy because it contributes around 70 percent to economic output.
To mitigate the effects of the corona crisis on the German economy, the federal government has decided to help companies with unlimited credit programs. It provides the KfW with around 20 billion, says Peter Altmaier. KfW can lend companies up to EUR 550 billion to ensure that they survive the pandemic and protect their employees from the effects of the pandemic, Altmaier said.
According to Finance Minister Olaf Scholz, Germany is ready to assume additional debt and will consider comprehensive fiscal incentives if the situation worsens. The decision of the federal government may have been a reason why the Dax recovered.
In addition, according to state aid from the federal government and EU investors, the risk of bankruptcies is lower. The “Markit iTraxx Europe Crossover” index, which serves as a barometer for the insurance costs of European companies, gives 85 basis points to 493 basis points.
But do today’s price gains mean the end of massive losses on the German stock market? Several indicators clearly signal no. One only has to look at the behavior of private investors, who are already speculating on rising prices.
The Stuttgart Stock Exchange’s Euwax sentiment, which is formed from real trades with Dax leverage products, is again speculative. Investors have significantly more call in their portfolios than short products that benefit from falling prices.
Such behavior after the crash days is a classic contraindicator because when prices fall, investors quickly sell again. Stock exchange experts know that a sell-off only ends when there are hardly any sellers left.
Even if institutional investors are a little more cautious, there are still too many optimists in the market. “The hope of many actors that everything will turn out for the best is still too great,” explained Joachim Goldberg after evaluating the sentiment survey of the Frankfurt Stock Exchange.
Felix Herrmann, capital market strategist of the asset manager Blackrock, sees it similarly. He doesn’t believe in an end to the sell-off. “My expectation is that stocks will be even cheaper in the next few weeks,” he says.
When asked “If the Dax will be higher in twelve months than today”, he would answer “yes” – in the short term, it could only go further down at first.
Ulrich Stephan, chief investment strategist for companies and private customers of the German bank, expects further fluctuations on the stock exchanges to continue in view of the opaque situation for companies and analysts.
At the moment, the sell-off has the side effect of cheaper prices for investors who have been waiting for entry opportunities. The valuation levels have dropped significantly, measured by the price-earnings ratio, Dax and Stoxx 600 are over ten percent cheaper than the average of the last 15 years.
But: “The valuations should rise again in the coming weeks, however, because the analysts are likely to further lower their profit estimates due to the coronavirus pandemic. The markets are currently not pricing in a drop in profits in the current year, ”emphasizes the stock exchange expert.
According to the chief strategist at DZ Bank Christian Kahler, share prices in a recession in the past mostly fell below the book value of the company. The book value of the Dax is currently around 8100 points. “It is therefore quite conceivable that the stock markets will continue to reset in the coming weeks and only find their low in the range, converted to the Dax, between 8000 and 9000 points in April or May.”
ECB chief economist clarifies Lagarde statements
There was news from the European central bank: Philip Lane, chief economist of the ECB, made a blog entry on the central bank’s homepage on Friday that he and his colleagues on the Governing Council wanted to continue to intervene in the turmoil in the government bond market.
This clarification was necessary because ECB President Christine Lagarde had raised the risk premiums of Italian government bonds with an awkward statement the day before. She corrected herself afterwards in an interview with the US broadcaster CNBC, but this did not calm the markets consistently.
The short summary: The ECB makes targeted purchases to absorb high risk premiums in panic situations – for example, bonds from certain countries. That was exactly what Lagarde had denied the day before during the ECB meeting.
Lane also made it clear that in such cases the ECB can deviate from the so-called capital key, i.e. the weighting of purchases according to the economic size and population of the euro area countries. The only decisive factor is that these proportions are preserved in the total portfolio of bonds – including those from previous purchases.
Lane returns to an earlier interpretation of the rules. A statement by Lagarde, on the other hand, could at least be understood as if the additional purchase program of 120 billion euros decided on Thursday should be balanced by the end of the year. The chief economist also believes that future ECB rate cuts are possible.
Price falls in comparison
The Dax is currently experiencing the fastest crash in its history, so it’s worthwhile for investors to look at the previous crashes. The comparison with the financial crisis is particularly worthwhile because, in both 2008 and 2020, share prices had risen faster for years than the companies were able to increase their profits.
Since the Dax is a performance index that includes dividends, the chart of the Dax price index offers better support without dividends.
The comparison: the price index reached its high of 5282 at the end of 2007, after which it fell by more than 55 percent to 2258 points. Transferred to the current situation, this stock market barometer has further downside potential without dividends. So far, the minus is “only” around 32 percent.
The price index has so far dropped from 6136 points to 4062 points. In contrast to the financial crisis, what has been completely missing so far are intermediate recovery phases. The current trading day meant at least a slight recovery.
Focus on bank stocks
And like in the financial crisis, investors should keep an eye on banks’ prices. Because since the beginning of the year, the Stoxx 600 banks has collapsed more than a third. The shares slipped from yesterday on Thursday Commerzbank and Deutsche Bank hit new record lows.
This Friday, however, the trend is to relax again: Deutsche Bank shares peaked at more than 18 percent, and Commerzbank stocks have even increased by up to 19.67 percent in the meantime. Later, however, the two bank papers fell sharply again and closed around four percent firmer.
A worrying fact is that in the past few days the Credit default swaps (CDS) have skyrocketed in price: Today, they signal an increasing likelihood that the capital cushion built up over the past few years will not be sufficient to bring all banks through a potentially drastic corona crisis without a capital squeeze.
View of Italy and Spain
On two southern European stock exchanges, bans against a crash continuation. In response to the sharp drop in share prices, Italy’s financial market regulator Consob has banned short sales of 85 companies’ shares after prices on the Milan Stock Exchange plummeted 17 percent. This affects above all the bank titles. The ban applies to this Friday.
Short sales of 69 shares were also banned in Spain to prevent the mass sales of these companies’ securities. The ban applies to all paper that yielded more than ten percent on Thursday and all illiquid stocks that fell by more than 20 percent. The Spanish stock market index IBEX fell over 14 percent on Thursday, the largest loss ever measured in one day.
The German Stock Exchange does not want to impose a short sale ban despite the turbulence on the stock markets. One does not take such a step, said a group spokesman on Friday. After the collapse of the stock markets on Thursday, speculation had arisen that short sales could also be prohibited in Germany.
With short sales, investors bet on a drop in the price of a share. In doing so, they sell securities that they borrow beforehand for a fee. If the price drops by the return date, they can stock up on the titles more cheaply and cross in the difference. On the other hand, if the price rises, the short sellers are at risk of loss.
Consequences of the corona virus: This is how long a recession could last
Look at the individual values
Wirecard: The company has published a preliminary version of the KPMG special audit, which is intended to clarify the numerous allegations that the group has faced in recent months. As of now, however, this only provides limited information about the accounting methods Wirecard. The stock had lost 17.9 percent yesterday, today it was up almost 30 percent at the start of trading. However, Wirecard went out of business with an increase in value of only 4.47 percent.
Roche: The FDA passed a test by the Swiss pharmaceutical company Roche temporarily approved for the detection of the Sars-CoV-2 virus as part of an emergency determination. Roche wants to push its capacity limits so that millions of tests can be made available to hospitals and laboratories in the United States and, in some cases, in Europe. A single test system delivers results of up to 4128 samples within 24 hours. The share tops the German stock market by more than eleven percent, but it only went up slightly by 3.15 percent from trading.
Dräger: The Lübeck medical technology group Drägerwerk has received a major order from the federal government to supply 10,000 ventilators. The processing of the order will extend over the whole year, said Dräger on Friday with. In response to the spread of the corona virus, the federal government announced on Thursday evening that it would significantly expand ventilation capacity in Germany.
“This is the largest order we have ever had,” said a Dräger spokesman. “We have to expand capacities.” It is very unusual for a government to order directly from the company. Hospitals and clinics are usually the customers. At the close of trading, Dräger paper was up 16.1 percent at EUR 58.05.
What the chart technique says
In the past 16 trading days, the German stock index has dropped 14 times with a minus. The stock barometer is still far from stabilizing. Chart technology and fundamental reasons are currently irrelevant to investors.
Gregor Bauer, independent portfolio manager and chairman of the Association of Technical Analysts in Germany, says: “This is a sign of panic, as is the phenomenon that investors hardly differentiate between industries or companies in their sales. There is no end in sight to the sell-off. “
In terms of charts, we have a bear market as the major indices are now more than 20 percent below their all-time highs. In crisis mode, the low of February 2016 at 8,699 points defines the next line of retreat. To take the most pressure off the Dax, you need at least one trading day without a new low or, like today, at least one day with a slight plus sign.
Here is the page with the DAX course, here is the current tops & flops in the Dax. Current Short sales of investors can be found in our Short sales database.