Weekly Outlook: “Higher risks of correction”
The US Federal Reserve could give the stock markets a further boost in the new week. However, there are increasing warnings of short-term price overheating.
16 December, 2024 FRANKFURT (Frankfurt Stock Exchange). The DAX starts the last full trading week before Christmas with a minor loss. In the early morning, the DAX indication stands at 20,360 points. On Friday, the DAX had reached a new all-time high of 20,523 points. However, the weekly closing price of 20,405 points only represented a small gain of 0.1%. The second tier of the German share index fared much worse. The MDAX lost almost three percent of its value. The European Central Bank's latest interest rate cut failed to give the markets any new boost, partly because ECB President Christine Lagarde subsequently emphasized that there was no automatic mechanism for further interest rate cuts. The stock markets are therefore currently taking a breather after the brilliant rise in prices at the beginning of December.
Hope for positive signs from the Fed
In the new trading week, the focus will once again be on central banks. According to analysts, the last meeting of the US Federal Reserve this year will be the most important on Wednesday evening. The market is expecting a further interest rate cut of 25 basis points, although the decline in inflation has recently stalled, as Commerzbank states. As the real economy remains very robust, the market is assuming that the Fed will take a break next year. As a result, the stock markets could “receive another boost in the week before Christmas if the central bank gives clear signals for further interest rate cuts”. In the USA, the Nasdaq Composite climbed above 20,000 points for the first time in its history on Wednesday.
Have the markets already exceeded their target?
Overall, the stock market has performed very well so far this year. The DAX is up around 22% since the beginning of the year and has performed very well, especially in recent weeks. The analysts at LBBW are not fully comfortable with this. “The brilliant year-end rally gives rise to fears that the markets have overreached their target,” they warn in their weekly outlook. The strong performance and weak earnings development of DAX companies are “disproportionate to one another”. In combination with other factors such as various political risks, this could prove to be a burden for stock market performance in the coming months.
Trend vs. Sentiment
Sentiment, which currently reflects a very high level of optimism among investors, is also sending out warning signals. According to Jens Ehrhardt, fund manager and publisher of Finanzwoche, all relevant indicators are currently signaling "risks of overheating". At the same time, however, the seasonality, after a pause in the second third of December, suggests that stock prices will continue to rise until the end of the year. Robert Rethfeld of Wellenreiter Invest also points out that the upward trend on the stock markets is intact, but that the sentiment, which is showing extreme values in some cases, "does not leave much room for upward movement".
Key Technical Indicators for the DAX
Jörg Scherer of HSBC describes the recent performance of the DAX as a typical "breather" despite the 42nd record high of the year. According to the chart technician, the rather below-average weekly trading range of 250 points and the almost identical opening and closing prices of the past week demonstrate "the current pause". A jump above the current trend line at 20,623, which connects various highs and lows since February 2023, would be a new pro-cyclical (uptrend) confirming signal. On the downside, the technical analyst describes the recent upside gap from early December at 20,085/20,038 as the "first pullback area". Strategically, the breakout level and old all-time high at 19,675 is also an important support for the German stock index.
Important economic and business events of the week:
Monday, 16 December
10:00 a.m. Eurozone: Purchasing Managers Indices. Economists at Commerzbank are not very optimistic about the upcoming data. According to them, the economic weakness seems to be spreading to other countries. However, they expect the eurozone economy to pick up gradually over the course of next year.
Tuesday, 17 December
10:00 a.m. Germany: ifo Business Climate. According to Deka, the first full ifo survey after the US elections and the end of the "traffic light" government will not bring any major changes. The experts expect a further deterioration in the business climate, with the weak economic situation in Germany likely to be the dominant theme.
Wednesday, 18 December
8:00 p.m. (CET) USA: Fed rate decision. The US Federal Reserve is expected to lower its key interest rate by another 25 basis points. Jerome Powell's subsequent comments will be interesting. According to DWS, the Fed chairman will signal that the central bank needs more time to lower interest rates to a neutral level. Analysts currently expect two more rate cuts next year.
Thursday, 19 December
Japan: BoJ interest rate decision. After two recent interest rate hikes by the Bank of Japan (in March and July), Deutsche Bank is now calling for an "uncertain decision on interest rates". However, the chief economist for Japan sees a rate hike as the "most likely scenario".
GB: BoE rate decision. In the UK, Deutsche Bank's UK economists expect the interest rate to be held at 4.75% by a vote of 9-0.
Friday, 20 December
2:30 (CET) USA: PCE Consumer Price Index. The price index for consumer spending excluding food and energy is expected to show an annual increase of 2.9% (after 2.8% in the previous month).
By Thomas Koch, 16 December, 2024, © Deutsche Börse AG
About the author
Thomas Koch is a CEFA investment analyst, investment specialist for structured products and a certified certificate consultant. He has been a freelance journalist covering events on the capital markets since the beginning of 2006.
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