MThe stock exchange reacted with great relief on Thursday to the resumption of gas flow through Nord Stream 1. However, the escalating government crisis in Italy gave investors new lines of concern. After some ups and downs, the Dax fell by almost 1 percent to 13,160 points before the meeting of the European Central Bank by midday. Pharmaceutical and chemical stocks, which are heavily dependent on gas, such as Merck KGaA and Brenntag, rose by around 4 and 2 percent among the biggest daily winners in the Dax. The shares of the gas importer Uniper, which is negotiating an entry for the state, jumped up and down in the M-Dax. Initially up 5 percent, the Uniper share slipped 6 percent into the red by Thursday afternoon and cost 11.05 euros.
In addition, freshly presented half-year figures moved the courses. Satorius was right at the top of the Dax with a full plus of 6 percent. The laboratory equipment supplier exceeded expectations with its half-year figures. In contrast, SAP’s shares suffered from the fact that the software manufacturer had to reduce its profit target range for this fiscal year because of the war in Russia. The SAP share lost on Thursday by almost 3 percent to 88.25 euros. Only the meal kit supplier Hellofresh lost even more, which on Wednesday afternoon presented higher sales and better results for the second quarter than experts had expected. Nonetheless, Hellofresh lowered its targets for 2022.
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To the detailed view
The euro, which is suffering from tensions between the EU and Russia and slipped below par with the dollar a week ago, initially gained half a cent on Thursday morning to hit $1.022. When new concerns about Italy’s debt sustainability flared up after the resignation of Italy’s Prime Minister Mario Draghi, the euro slipped back below $1.02. The yield on Italy’s 10-year government bonds rose to more than 3.5 percent on Thursday afternoon, from 3.2 percent on Wednesday.
Holger Schmieding, chief economist at Bank Berenberg, commented that a rise in Italy’s yield, especially in comparison to German bunds, could be just the signal to remind a future Italian government how much Italy has to lose – namely around 5 percent of its Annual economic output (gross domestic product). This is how large the EU program NextGenEU is in the case of Italy, which is intended to finance the investment needs that have become apparent in the corona pandemic, for example in digital infrastructure. However, the development cooperation payments are linked to certain conditions of sound financial policy. Italy, on the other hand, is already highly indebted at around 130 percent of its annual economic output. As Schmieding explains, 26 percent of Italian bonds are on the European Central Bank’s balance sheet.
This will spice up the meeting of the European Central Bank’s Monetary Policy Council on Thursday afternoon. Investors firmly assume that the ECB will raise interest rates for the first time in more than ten years. The extent alone, whether by 0.25 or 0.5 percentage points, is unclear. In addition, an instrument is to be presented at the meeting with which the divergence in yields between Germany and Italy, for example, can be prevented. Schmieding points out that even if the ECB were to stop all government bond purchases now, almost all of the Italian bonds would remain on its balance sheet until at least the end of 2024. The interest payments that Italy currently has to make on its national debt accounted for only 3.7 percent of economic output in the first quarter of 2022 thanks to the ECB’s low interest rate policy – their share would therefore be close to a 30-year low.
In the past two days, investors had already started betting that Russia would resume gas supplies after 10 days of maintenance work. However, there were great fears that Russia, after Western sanctions over its attack on Ukraine, might cut gas supplies or not resume them at all. Together with the rising prices for many commodities and the interest rate hikes by the central bank that are necessary to combat inflation, this results in a scenario in which a recession is becoming increasingly likely. The expectation of weaker economic performance is also reflected in the demand for oil. Brent crude oil prices showed a rather negative reaction to Russia’s restarted gas supplies on Thursday. 159 liters of Brent cost a good $106 on Thursday morning, about a dollar less than two days ago.
Pessimism among equity investors is very high right now, according to the monthly survey of fund managers from Bank of America Merrill Lynch. The fund managers have held fewer shares than they have since 2008, when the bankruptcy of the American bank Lehman Brothers sent shock waves through the financial markets. The experts at Bank of America interpret the survey as a counter-indicator: a recession has been priced in and the stock market has fully capitulated. After the adjustment in the first half of 2022, in which the most important stock indices such as the American S&P 500 and the German Dax fell by more than 20 percent, things could now go up again.