Highlights

  • DAX hits high for year

  • Bernanke: tentative optimism, exit still a long way off

  • Ifo recovers further


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 – a hurdle difficult to clear at 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 – as some of its competitors – 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 Bernanke’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 economic stabilization. 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 reduce employment.

Next week the credit crunch debate is likely to be fuelled by the ECB’s new Bank Lending Survey on 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 banks’ 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.