tentative optimism, exit still a long way off
Stocks outperform euro
Forex markets have decoupled to some extent from stock
markets: Only at the beginning of the
week were they able to follow surging stocks. EUR-USD
rose to 1.4277, but then ran out of
steam even as the Dax scaled new highs in the second
half of the week, reaching the highest
level so far this year at 5300. The common currency on
the other hand fell back to around 1.42 at the end of the week â€“ a hurdle difficult
to clearat the moment. USD-JPY more or less moved sideways too, closing this
week the same as last at 94.50.
The DAX was fuelled mainly by strong corporate earnings.
There were a few disappointments such as Morgan Stanley and Wells Fargo. The
latter in particular â€“ as some of its competitors â€“ had to digest a massive
increase in credit-loss provisions. But on the whole, expectations were
exceeded. Companies such as Caterpillar were mainly able to post higher profits
because of cost
cutting measures. Sales, however, have declined sharply
in the second quarter as expected.
Markets had hoped for a more upbeat message from Fed
Governor Ben Bernanke before the Senate. Mr Bernanke did speak of signs of
stabilization in the US economy, but at the same time
he emphasized that unemployment would continue to rise
strongly, which might be a drag on
private consumption. Therefore the key interest rate
would remain at its very low level for a considerable time. The Fed Governor
said an exit from the very expansive monetary policy would depend on the labour
market, capacity utilization and inflation expectations. Mainly because of the rather
dismal outlook for the US labour market, a policy switch has thus apparently
moved a long way into the future. Accordingly, bond markets gained strongly.
Subsequently, markets took little notice of Mr Bernankeâ€™s
comments on an exit strategy. He was very detailed on the instruments with
which the Fed is planning to mop up excess liquidity in a smooth and timely way
once the economy recovers. The Fed Governor showed himself convinced that any
inflationary risks were under control. To this, bond markets reacted with an upwards
movement which proved to be temporary, however. Bond prices retreated again
when the stock market rally continued in the second half of the week.
Macroeconomic data further confirmed an economicstabilization.
German ifo business sentiment improved for the fourth consecutive time in June.
For the first time the current situation was
assessed to be significantly better, albeit mainly in
the retail sector, which indicates that the economic stimulus programmes are
having some effect. However, the ifo remains at a very low level and companies
are still planning to reduceemployment.
Next week the credit crunch debate is likely to be fuelled
by the ECBâ€™s new Bank Lending Surveyon 29 July. Moreover, the money supply data
for the euro area are due on Monday. In the past months the growth rates of
credit aggregates have been falling continuously. The latest figures showed
that credit expansion has come to a halt or is in fact already declining
slightly. If this trend continues, pressure on the ECB Council to take measures
against a credit crunch will increase. The Council meets on 6 August. Calls from
politicians for de-crunching measures are getting increasingly louder anyway.
A credit crunch and banksâ€™ rising loss provisions are
issues that could put the crisis to the front
again. Therefore it looks unlikely that EUR-USD will
break out of its current trading range of 1.37 to 1.43 next week.
Uwe Angenendt +49 69 718-3648
Grabbe / Klaus NÃ¤fken
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