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Common sense suggests that financial markets reflect the state of the economy: when things are going well, assets should soar, and vice versa; when downturns are on the horizon, risk appetite should fall, as well as the EUR/USD pair.
If this were true, we could easily predict how markets will move and how to make money by monitoring incoming macroeconomic data. But, as with most things in life, it’s not that simple.
Let’s take Germany as an example. After economic institutions reduced their GDP growth expectations for 2024 from +0.1% to -0.1%, the government has also stated that it no longer expects growth this year.
To make matters worse, the country’s unemployment rate rose more than expected in September, with an increase of 17,000 people, exceeding economists’ forecast of a 13,500 increase.
+ The September IFO business climate index declined to 85.4, down from the forecast of 86.1 and down from 86.6 in August. Business expectations also fell to 86.3, down from 86.8 in the previous month.
Add to this the fact that across Europe, Goldman Sachs and BlackRock are forecasting an impending economic recession and its potential impact on corporate earnings. Thus, we receive a rather gloomy outlook.
Yet last week, the DAX not only showed no signs of falling but also broke through the 19,000-point barrier for the first time. So, it doesn’t look like anyone is panicking, and there is little correlation at first glance.
What is going on?
It seems one thing isn’t related to the other, but that’s not entirely true. The market’s seemingly irrational behavior is more than justified by hopes for an ECB rate cut.
It is worth noting that Eurozone inflation data will be released this Tuesday. A decline in inflation will reinforce expectations that the ECB will indeed implement a 25 basis point cut at the October meeting.
So, on the one hand, we have weak economic data and, on the other, a drop in inflation, both of which are fueling expectations for a more dovish stance from the regulator. And driving up demand for riskier assets.
