German business morale fell again in September, the fifth month of deteriorating sentiment data out of Europe’s largest economy. It’s the latest signal that the euro area is going through a difficult third quarter with the economy weakening while inflation remains high. Markets reacted negatively with yields on German ten-year bonds hitting their highest levels since 2011.
Germany’s ifo Business Climate Index came in at 85.7 points in September, down slightly from August’s 85.8 points. Business expectations, however, brightened up slightly to 82.9 points from 82.7 points last month, meaning pessimism is slowly becoming less bad. The European Commission now expects the euro area economy to grow by just 0.8% this year, largely dragged down by Germany, which was already in a recession in late 2022 and early 2023 and has since been struggling to create economic growth.
Following the release of the ifo data, German ten-year bond yields hit the highest level since 2011, trading at around 2.8% on Monday. Germany’s DAX dropped 1%. European markets overall fell somewhat less with the Stoxx Europe 600 losing 0.6% on Monday. Consumer price data from Germany and other European countries due later this week will give investors an indication about the European Central Bank’s (ECB) next move after the ECB raised rates for a tenth consecutive time earlier this month.
In New York, stock indices ignored the weak economic data coming out of Europe and managed to stabilize at the start of the week. The Dow Jones Industrial gained 0.1% and the S&P 500 put on 0.4%. The Nasdaq-100 ended the session 0.5% higher. The stabilization comes despite more uncertainty was on the horizon. A possible shutdown of the US government due to budget constraints could come as early as Sunday, depending on budget legislation that is under consideration. Treasuries came under pressure with yields on ten-year government debt rising to 4.552%, which was last reached in 2007.
In the Asia-Pacific region, stocks were struggling again on Tuesday with no major economic data or central bank decisions to lift market sentiment. In Tokyo, the Nikkei 225 was trading down 0.9% and in South Korea, the Kospi lost 1.2%. In Australia, the S&P/ASX 200 is down 0.5%. Chinese markets were also under pressure with Hong Kong's Hang Seng Index dropping 1%, while the Shanghai Composite fell 0.3%.
Corporate news in focus: Costco Q4 figures.
Economic data in focus: US building permits (14:00 CET), Conference Board Consumer Confidence Index (16:00), US new residential sales (16:00).
All about global economic and market trends at a glance
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Editor: Alessandro Fezzi
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We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).
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We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.
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Definition of rating categories of S&P and Moody’s which are relevant for us:
AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates
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