Rating Agency Fitch as Party Killer – DAX Dives Under 16,000 – The RoboMarkets Weekly Review and Outlook

Jürgen Molnar, Capital Market Strategist RoboMarkets

04 August 2023

And that is what the stock market found in the past trading week in the withdrawal of the best rating for the USA by the rating agency Fitch. The world’s largest economy has thus lost the best possible AAA rating for a second time. This already happened once in 2011, when the agency Standard and Poors did it. As a result, the DAX fell by 25 percent in a few days. If this event were to repeat itself, it would mean a level of 12,300 points.

Downgrading With Symbolic Character

Fitch may have been just the pebble that could now trigger a small avalanche on the stock market. For in practical terms, nothing will change in the fact that investors around the globe must have the government bonds of the largest economy in their portfolios, regardless of whether they are rated AA+ or AAA. Even if the theory would now suggest caution in dealing with American government debt. A US default has not become even a tiny bit more likely in recent weeks, months and, in terms of the debt mountain, years. A country that can borrow in its own currency and continue to grow strongly economically with this high international competitiveness will not go bankrupt.

German Stock Market Escapes Reality

The correction in the DAX that has now set in is more due to the fact that after the 40 percent gain in the past ten months, we have reached a point where prices reflect too much fantasy and too little reality. Your stock market barometer at record levels does not fit at all into the picture of a German economy cut off from the competition that many economists paint for the future. This is what some investors thought in the past few days, when they cashed out after the rally. Added to this were some disappointing figures from major companies, and the cocktail for a breather was prepared.

Covestro, DHL and Carmakers with Problems

The chemical company Covestro, like the industry leader BASF, had a very weak quarter. The operating profit fell by 30 percent, but was within the range that had previously been corrected downwards. The bottom line, however, was much more devastating. Almost 80 percent less profit is bad news and once again impressively illustrates the problems of the chemical industry in Germany. Things are not looking particularly good at DHL either. After a 16 percent drop in turnover and a one-third drop in profits, many investors parted with the share, which had gained almost 30 percent since the beginning of the year. And then there were new figures from the car industry.

According to these, every second electric vehicle currently goes to China; of a good 27 million vehicles, 14.6 million are registered in China. Tesla is still the market leader in this segment. The Americans obviously have good access to the largest sales market in the world and better access than the German carmakers. But it is not only that their electric vehicles find fewer buyers, as recently reported by Porsche or Volkswagen. The high sales of e-cars in the Middle Kingdom are also displacing the demand for combustion vehicles – a segment in which German manufacturers dominate. If this development continues, it could become even more uncomfortable for VW, Mercedes and BMW than it already is.

US Labour Market Sends Hopeful Signals

The US economy added “only” 187,000 jobs in July, one would like to say. Expectations were for 200,000, but after Wednesday’s report from the private employment agency ADP, fears were that there would be another runaway upward on Friday. With this data, however, hopes remain that the Fed is finally taking a pause in its cycle after eleven rate hikes in a row. The DAX, however, continued to fall after the figures, the traffic light is now clearly on red, better times should come again, but are likely to be a while in coming.

DAX – Current Supports and Resistances

Supports: 15,700/15,650 + 15,550/15,500 + 15,000/14,950

Resistances: 16,000/16,050 + 16,200/16,250 + 16,400/16,450

This article is from RoboMarkets.