Markets Update August 2023 - A choppy autumn awaits global stock markets

The lack of momentum and latent fragility of recent weeks is typical of the current phase in the annual stock market cycle. In late summer, market activity often shows increased volatility and a tendency to corrections. This seasonal effect is exacerbated by renewed interest rate pressure. For example, the landmark market interest rates on U.S. government bonds with a maturity of ten years have risen noticeably and are now firmly established above the 4 percent mark. The main reason for this development is the unchanged robust U.S. macro data. Added to this is the intention of the US Treasury to issue a significantly higher volume of bonds in the coming months than originally planned, and the downgrade of the US credit rating by the rating agency Fitch. All these factors create the conditions for a restrictive interest rate environment in the coming quarters. For the global stock markets, this is a veritable risk. This is because the now quite high valuations on the global stock markets are not compatible with long-term interest rates of more than 4 percent. As interest rates are likely to remain high in the coming months, interest-rate-driven corrections on the markets cannot be ruled out. This means that investors are in for a choppy autumn.

Chinese economy in tangible crisis

The markets cannot expect any relief from China at present. The economic situation there is now so precarious that prices are falling year-on-year. China, unlike the industrialized countries, is thus struggling with real deflation. The very weak trade data and the disappointing data on lending confirm the fragile overall macroeconomic picture. The fact that demand for credit in particular remains weak despite lower key interest rates and generally relaxed financing conditions is a clear symptom of a balance sheet recession. At the same time, private households and companies are so over-indebted that they are being forced to step up their savings efforts. Unorthodox measures to stimulate the economy would be more effective in this situation, but they are not desired because they would reinforce economic imbalances. In view of this dilemma, China is unlikely to contribute significantly to global economic growth in the course of the year. This would be a particular burden on the euro zone and the emerging markets, which each have a high correlation with China and global trade.