DAX 30 Fundamental Forecast – September 2016

The DAX 30 closed the month at 10,592 seeing a gain of 2.54% on the month as the German economy continues to improve and the lower euro helps exports and GDP. September is a month that will put the course of central bank easing to the test with the Fed meeting Sept. 20 and 21, the same days the Bank of Japan meets. The BOJ is expected to unveil a review of its own extreme negative interest rate policies. The Fed is not expected to raise rates that at that meeting, but market odds have been rising to as high as 40 percent that it could, after comments from Fed officials at their Jackson Hole, Wyoming symposium last week. Brexit, or the U.K.’s vote June 23 to leave the European Union, ripped markets briefly, before investors adjusted to the idea that it would not be an immediate split. The Bank of England has promised more easing, and its Sept. 15 meeting is being watched for a possible rate cut. The European Central Bank was also expected to keep an easy hand on the tiller, and when it meets in the coming week, it could detail what other type of assets it will buy.

During the euro crisis, the European Central Bank kept the currency union intact through its monetary measures, and now we are hoping against hope that QE will lead to (lasting) economic recovery and that it will continue to mask the persistent macroeconomic imbalances in the currency union. An abrupt termination of QE would not be desirable from an economic perspective. But you could argue that since QE has been decided on, it would be wise to ensure that these funds find their way economic activity more directly, for example through the monetary financing of the Juncker plan, instead of mainly pushing up asset prices as is the case in the current setup. But once again, this requires the political decisiveness and governance that is lacking in the currency union.

If we can draw one main conclusion from the events of the past year, it is that, while an underlying economic problem can be temporarily covered up, financial markets will always end up exposing it eventually. Despite massive amounts of quantitative easing by central banks worldwide, financial market participants remain skeptical of the beneficial effects of such monetary policy on the economy and inflation. We anticipate that low interest rates will continue to dominate capital markets in 2016.

One of the main themes reviewed in this Outlook is the shift in focus of financial markets to emerging economies. In somewhat oversimplified terms, we could state that the West, in pursuing highly expansionary monetary policies, has exported its financial crisis – or at least some of the consequences of this crisis – to the rest of the world. This has led to a significant increase in gross public and private debt (a portion of which is denominated in foreign currencies) in these countries, most notably China

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