Cautious optimism and Chinese regulatory frenzy

Many companies were able to meet or exceed the high profit expectations for the second quarter. Rising producer prices, supply bottlenecks and a resurgence of pandemics make companies more cautious but still optimistic about the future. In China, on the other hand, the government caused deep red figures with regulations and statements.

In July, the international stock markets, apart from most stock exchanges in Asia and the emerging markets, largely moved sideways with a friendly trend. The German share index DAX remained stable with a result of 0.09% compared to the previous month. The broad European index Stoxx Europe 600 rose by 1.97% and the US index S&P 500 gained 2.19%. In contrast, Hong Kong's Hang Seng Index closed the month with a loss of -10.10%. Global equities, as measured by the MSCI World Index, advanced by 1.64% - all index figures in euro terms.

The stock markets were supported on the one hand by the still robust economy and on the other hand by the majority of companies, which were able to confirm or even exceed the high profit expectations of market participants in the reporting season for the second quarter. On the other hand, the declining optimism of companies slowed down an even better development on the stock markets. In view of persistent supply bottlenecks, rising producer prices and a pandemic that is now on the rise again, companies in both the manufacturing and services sectors tended to assess their prospects for the coming months more cautiously. For example, the German ifo business climate index declined for the first time since November 2020, falling from 101.7 to 100.8 points (to the level of early 2017). Purchasing managers' indices also fell slightly from high levels. For example, the US ISM manufacturing index fell for the second month in a row, from 60.6 to 59.5 points, but was still well above the expansion threshold of 50, which signals growth.

Rising inflation, especially in the US, continues to worry many market participants. In the USA, inflation in June was 5.4% (Germany: 2.3%) higher than in June 2020, marking the strongest increase since 2008. With rising inflation, market participants' expectations increased primarily towards the US Federal Reserve to reduce (tapering) or phase out its bond-buying programmes and possibly raise interest rates earlier than announced (2023). However, the central banks in the USA and the euro area maintained their purchase programmes and confirmed the current interest rate level of 0.00-0.25% (USA) and 0.00% in the euro area. Yields on 10-year German government bonds fell 25 basis points in July to -0.46% and their US counterparts fell also 25 basis points to 1.22%. Thus, the already negative real interest rates (10-year government bonds minus inflation) fell to an even lower level.

In Asia, on the other hand, inflation hardly plays a role; in China, for example, it was 1.1% in June. There, however, the Chinese government's regulations and surprising statements (computer games are "intellectual opium") in and about the local technology sector led to deep red prices. This weighed on the stock markets in China and beyond in Asia, especially since the Chinese economy has not performed as strong as expected this year, market sentiment is irritated by Corona, i.e. the spread of the delta mutant, and the real estate market is weakening.

 

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