☀️☕️ Germany’s Perfect Storm

📊 Also: NVDA blows past the Street (again); China quant; Soggy Japan sentiment 🎓 Recessions (& Bears)

📈 Market Roundup [22-Feb-24]

US large-cap S&P 500 closed 0.13% UP ▲

Tech-heavy Nasdaq Composite closed 0.32% DOWN 🔻

Pan European STOXX Europe 600 closed 0.17% DOWN 🔻

HK/China's Hang Seng Index closed 1.57% UP ▲

Japan's broad TOPIX closed 0.19% DOWN 🔻

📝 Focus

  • Germany’s Perfect Storm 

📊 In the Markets

  • NVDA blows past the Street (again); China quant; Soggy Japan sentiment 

📖 MoneyFitt Explains

  • 🎓 Recessions (& Bears)

💸 Personal Finance Corner

📝 Focus

Germany’s Perfect Storm

Last week, Japan entered a technical recession🎓, losing its spot as the world's third-largest economy to Germany. On Wednesday, the German government revised its 2024 GDP growth forecast to 0.2% from 1.3%, narrowly avoiding a second year of shrinkage after falling 0.3% in both the fourth quarter of 2023 and also the whole of the year.

But on Monday, its central bank, the Bundesbank, said in its monthly outlook that "Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession”🎓.

The German economy has been struggling since the Russian invasion of Ukraine in 2022 sent inflation through the roof while its manufacturing-focused, energy-hungry economy suffered from weak demand from key trading partners, China included.

An almost perfect storm for the German economy - Image Credit: Tenor

..... ▷ The surge in inflation also deterred capital investment thanks to the increased borrowing costs from ECB’s high € interest rate policy to bring it back into line, while high nominal wage growth and strikes in several sectors only added to the “perfect storm.”

But following a series of interest rate hikes, German inflation slowed to 2.9% in January… not yet at but closer to the European Central Bank's annual 2% target rate, and well below the 8.7% peak rate in February 2023.

(It’s also lower than inflation in October 1923, when prices rose by 41% PER DAY.)

..... ▷ Rapid industrialisation in the nineteenth century made Germany Europe’s largest economy by 1900, excelling in sectors like chemicals and steel production.

World War II devastated its economic infrastructure, but, like its ally Japan, West Germany’s post-war reconstruction led to an economic miracle in the 1950s and 1960s. 

Both Japan and Europe received massive amounts of financial and technical aid from the US in the $2.2bn Dodge and $13.3bn Marshall Plans, respectively, but also shared common features, including hard-working populations, strategic planning and cooperation between firms and individuals. Both also benefited from limited defence budget spending.

Japan’s “Economic Miracle” and Germany’s “Wirtschaftswunder” were characterised by investments in education, technology and infrastructure, resulting in rapid growth, industrialisation and export-oriented industrial development… and the world’s third and fourth largest economies. 

..... ▷ So both Japan and Germany are in or facing technical recessions🎓 while their benchmark Nikkei and DAX stock market indexes are within spitting distance or through all-time highs.  

Meanwhile, US GDP growth keeps beating expectations… and its markets are also hitting all-time highs, though notably concentrated with the Magnificent Seven megacap stocks. 

And China’s economy is still growing more quickly than the US’s… but its stock markets, HK’s included, continue to tank and hit multi-year lows despite the promise of a series of targeted interventions to revive the moribund economy.

Just a reminder that the market is not the economy, and the economy is not the market!

Well, maybe… depends on your time horizon - Image credit: The Interview (2014) / Sony Pictures via Tenor

📊 In the Markets

The highlight of traders’ week came after US markets closed on Wednesday: Nvidia shares soared 8.4% in after-hours trading, after dropping 2.9% in the regular session, as fourth-quarter earnings per share beat estimates by 11%, with full-year earnings up 769% on the previous year. 

“Fundamentally, the conditions are excellent for continued growth”

Jensen Huang, CEO of Nvidia

The data centre unit in which its key AI chips like the H100 lie grew revenues to $18bn, up 409% from the previous year's period. 

Revenues beat the best guesses of Wall Street’s Finest again, as it has all year, this time by 7%, less than the 10% to 20% in previous quarters, which may simply reflect increasingly aggressive forecasting from the analyst community.

The company also delivered a bullish revenue forecast despite weak China sales, driven by robust demand for its artificial intelligence chips and helped by increased capacity at TSMC. 

Question for Thursday trading: “Is it not just better than expected, but better by enough?”

The S&P 500 saw marginal gains on Wednesday, while the Nasdaq closed lower for the third consecutive session ahead of Nvidia's nervously awaited earnings release.

Newly released Federal Reserve minutes from the January meeting revealed policymakers' concerns about cutting borrowing costs too soon, noting “that momentum in aggregate demand may be stronger than currently assessed, especially in light of surprisingly resilient consumer spending.”

Cybersecurity giant Palo Alto Networks plummeted by 28% after projecting third-quarter billings below expectations, leading others in the sector, like Fortinet, Zscaler and Crowdstrike, down in sympathy. (MFM: “This is War!”) 

In Europe, London’s FTSE 100 fell 0.7%, dragged down by an 8.4% drop for index heavyweight HSBC following an earnings miss. 

Asia-Pacific markets traded mixed on Wednesday after Wall Street’s losses the day before. 

But Hong Kong and China's stock markets surged after new regulations for quant-driven funds were unveiled. Shanghai and Shenzhen exchanges mandated that these funds need to disclose investment strategies to regulators before trading.

Japanese stocks drifted lower as the Reuters Tankan survey showed that manufacturers’ business confidence plunged to -1 in February from 6 in the previous month.

The monthly Reuters Tankan sentiment index is an entirely separate survey from the BoJ Tankan survey and focuses on manufacturing only. It is also scaled differently, calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure just means pessimists outnumber optimists.

📖 MoneyFitt Explains

🎓 Recessions

A country is in a recession when there is a significant decline in economic activity, usually with a rise in unemployment.

A common rule of thumb is when economic output goes down compared to the quarter before it in two or more consecutive quarters. This is measured by its real (inflation-adjusted) GDP, which is a measure of the size of an economy and is the monetary value of goods and services produced there in a particular period. This is known as a “technical recession.”

Bear markets and recessions are not the same thing. (Bears are lazily defined these days as a drop of 20% from a recent peak.)

Recessions often trigger an increase in the unemployment rate, which is based on the number of workers who want a job but don't have one. This is painful and can be socially disruptive, but unfortunately is part of the normal business cycle where good times lead to a period of over-investment, over-hiring and over-consumption, followed by a hangover.

An important thing to note is that economic boom and bust cycles are normal, even if the ending of a period of growth is in the form of a nasty recession. Up-cycles always end, eventually, as do down-cycles, though when you are in one, it is very hard to see the light at the end of the tunnel. But they do end.

(This is important to remember since recessions are often, but definitely not always, accompanied by bear markets, so for disciplined and careful investors, recessions and bear markets have often been great long-term buying opportunities.)

💸 Personal Finance Corner

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