DAX Surges As Hopes Are Dashed

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The latest market commentary on the surge in the DAX from Exante’s Senior Analyst, Victor Argonov.

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The Surge In DAX

The new week started with big hopes, or more appropriately wishful thinking on part of investors who were hoping to see an end in the conflict between Russia and Ukraine. European indices were led by a 3% surge in the DAX this morning, which is unsurprising given Germany’s large exposure to Russia. This came after Ukraine and Russia officials gave an upbeat assessment of the progress of talks. HOWEVER, just before mid-day in London, those hopes were dashed and European markets came off their earlier highs, while US futures gave up their entire overnight gains, before slumping. It looks like there won’t be an 'imminent' peace deal between Russia and Ukraine after all.

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Kremlin spokesman Dmitry Peskov said that "Russia will realize all its plans in Ukraine operation," adding that the "operation would be complete on schedule."

So, unless we see another twist in the talks, risk appetite is likely to remain very low for now, especially when you also consider the potential for Russia to default on its international debt. Moscow has lost access to almost half of its foreign-exchange reserves and has indicated it would be paying its debt in Ruble, which may not be accepted by the debt issuers. A Russian default could put significant pressure on European banks that may have large exposure.

Meanwhile, here is another worry: China has closed down its technology hub and home to 17.5 million people, Shenzhen, after a spike in Covid cases there. The lockdowns will threaten technology and auto manufacturing output in the nation. But its impact will be global. Apple supplier Foxconn has already halted operations in Shenzhen, meaning the iPhone maker will face further supply issues, which could hurt the company’s sales and profit.

Sell-Off In Government Bonds

We have also seen a sharp sell-off in government bonds today. The resulting rise in bond yields is unnerving investors on Wall Street, as the Federal Reserve prepares for a 25 basis point rate increase on Wednesday. The five-year Treasury yield rose above 2% for the first time since 2019, while the 10-year yield broke a new high for the year above 2.10%. Rising yields are normally not good for assets that pay no- or low- dividends or interest. So, you can understand why the Nasdaq futures were hit the hardest. Gold and silver fell for the same reason, although both managed to come off their earlier lows in response to the latest headlines from Russia.

The situation in Ukraine is not going to stop the Federal Reserve from starting its cycle of rate increases on Wednesday, as it battles to curb high levels of inflation. The hiking-cycle will most likely start with a 25 basis-point increase. Price pressures were already on the rise, but the Russian invasion has further exacerbated the situation with crude oil, wheat and many other commodities rallying amid fears of supply disruptions.

The problem for the Fed and other central banks is that their actions might choke off economic growth. Receding stimulus and high prices is going to hurt consumer spending, which will undoubtedly weigh on global economic recovery. Some fear that major economies in Europe will even fall into a recession.