DE30: Fed roils European stock markets

Summary:

• European stock markets open largely lower following the rate hike delivered by the Fed

• Fed/ECB reference rate differential closes the highs seen in the past

• More pain to come for bulls in the German equity market

The start to Thursday’s trading has not been successful to say the least as traders are digesting the rate hike delivered by the Federal Reserve yesterday. The red opening is a response to widespread falls seen on Wall Street as capital flew to bonds (the 10Y yield declined to 2.75%, the lowest since April this year).

The Fed/ECB rate differential has been rising gradually over the recent years reaching its historical highs. Source: Bloomberg

Why did falls occur if the US central bank signals less monetary tightening ahead? Equities are not cheap this is the fact when we look at various multiples hence the Fed’s communique could be viewed as an acknowledgment that slower economic growth is coming. Slower economic activity means a slower demand for goods and services and thereby slower revenue and most likely profits. In such an environment bonds tend to perform better and it was exactly seen immediately after the decision on Wednesday. Looking at the chart above we may notice that the difference between reference rates in the United States and Eurozone has already risen to the highest level since before the GFC, the same levels were observed in 1999/2000 as well. The key question is whether this matters for stocks? The quick and simple answer is no it does not. Based on the data since 1999 one may arrive at a conclusion that changes in the Fed/ECB reference rate differential did not affect the stocks market either in the US or Germany. This holds true except the period between 2003 and 2006 when the differential was moving in favour of the fed funds rate and the SP500 was losing ground relatively to the German DAX at the same time. Therefore, one cannot infer that the SP500 will be performing worse compared to the German stock market based solely on the present value conception (higher rates leads to lower present value and thereby lower stocks’ valuation). What’s more, tax cuts implemented in the US have distorted this relationship as well favouring US stocks than European ones.

The long-term outlook for the German stock market looks ominously as we can be only at the beginning of the larger leg lower. The price broke its long-term trend line two weeks ago and the past week failed to see a larger corrective pullback to the upside. Thus, the base scenario is the extended slide. If the price is to retrace at least 50% of the upside from 2011, one may expect to decline to 9280 points. Source: xStation5

After more than an hour of trading most of European stock markets are trading clearly below their closing levels. The DE30 is falling 1.2%, the French CAC40 (FRA40) is going down 1.5%, the British FTSE100 (UK100) is declining 1.2% and the EuroStoxx50 (EU50) is down more than 1% as well. Looking into the DE30 breakdown one may spot that Deutsche Bank is by far the worst performing index at the time of writing.

All stocks listing in the DE30 are decreasing in early European trading on Thursday. Source: Bloomberg

Looking for news from various companies it’s worth looking at Wirecard (WDI.DE) as the stock is falling over 2%. This fall came following the news that the global innovations leader in digital financial technology has deepened its partnership with Singtel’s Dash, the mobile payment app being headquartered in Asia.

Fresenius Medical Care (FME.DE) is also down almost 2% despite the positive recommendation from Sanford Bernstein. The group’s analysts set their target price at 88 EUR implying decent space to gain as the spot is around 59 EUR. The firm has currently a buy rating on the stock.