Risks and Potential Impacts of China's Credit-Fueled Rally on the DAX
Dax has commenced in a favorable manner.
There is currently a significant risk to the current rally in the DAX, according to financial experts, due to the ongoing credit-fueled rally in China. This situation presents several potential issues that could affect the German stock market.
Risks Associated with China's Credit-Fueled Rally
- Deflationary Spiral and Slowdown: China's economy is facing a deflationary dilemma, with a collapsing real estate market and weak consumer demand. This mirrors Japan's 1990s "balance-sheet recession," suggesting a prolonged economic stagnation could occur.
- Market Bubble Risks: The stock market's continued advance despite economic slowdowns and a property crisis raises concerns of a bubble forming. Analysts warn of "irrational exuberance" and a potential sudden correction.
- Debt Crisis: China's debt levels, particularly in local governments, are substantial and could lead to financial instability. The strategy to extend and pretend with debt restructuring may not adequately address the issue.
- Lack of Stimulus and Overcapacity: Unlike past economic downturns, China is not implementing a large-scale stimulus, focusing instead on curbing overcapacity. This approach may not suffice to revive weak household demand and could exacerbate economic vulnerabilities.
Potential Impact on the DAX
- Global Economic Interconnectedness: Given China's significant role in the global economy, any economic downturn there could impact global trade and investor confidence. This could lead to volatility in European markets, including the DAX.
- Trade Tensions and Credit Risks: A slowdown in China could exacerbate trade frictions, influencing inflation and economic growth worldwide. This environment could increase credit risks globally, affecting business confidence and investment decisions in Europe.
- Market Sentiment and Contagion Effects: A potential market correction in China due to a bubble burst could lead to reduced investor confidence globally. Such a scenario might trigger a contagion effect, impacting stock markets worldwide, including the DAX.
While the DAX is not directly tied to China's domestic market dynamics, the interconnectedness of global economies and financial markets means that significant economic developments in China could reverberate across European markets.
Meanwhile, the Dax started the trading day on Thursday at approximately 24,270 points, and was 0.4 percent above its previous day's closing level at around 9:30 AM. The AI boom is back at the exchanges, according to Thomas Altmann, but the Dax is currently an automatic underperformer due to this boom, he stated.
In other news, the oil price was rising, with a barrel of North Sea Brent crude costing 65.99 US dollars at 9 AM German time. Investors are favoring other markets, according to Altmann, and the European common currency was slightly weaker on Thursday morning, with one euro costing 1.1686 US dollars, and one dollar equivalent to 0.8557 euros. The performance of specific companies was not discussed in this paragraph.
[1] https://www.bloomberg.com/opinion/articles/2021-03-18/china-s-balance-sheet-recession-could-last-decades [2] https://www.reuters.com/article/us-china-economy-stocks-analysis-idUSKBN2B60JG [3] https://www.wsj.com/articles/chinas-local-government-debt-risks-are-rising-11617157744 [4] https://www.bloomberg.com/news/articles/2021-03-19/china-s-economic-stimulus-falls-short-as-policy-makers-curb-overcapacity [5] https://www.reuters.com/article/us-china-economy-gloom-analysis-idUSKCN2AR15E
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