The Brexit scenarios – and what they should mean for the Dax


Dusseldorf Within a good 14 days the Dax has risen by more than 1000 points, in the past week, the index rose by just over one percent. "This rally was fueled to a large extent by foreign investors," explains Stephan Heibel after evaluating the weekly Handelsblatt survey Dax-Sentiment and other indicators.

Two indicators suggest this view: First, the euro has risen by three cents against the dollar during this time. Foreign investors have probably sold dollars and bought the European common currency to invest in Euro zone equities.

And on the other hand, the moderate complacency of domestic investors speaks for this thesis. Usually investors are bursting with self-assurance after such a rally. This is not the case according to the current Dax sentiment values. Germans have apparently benefited little from the price increases.

The topic on the stock markets is the Brexit tragedy. (Follow the latest developments in the news blog here.) Any solution, however that looks, seems to be within reach. Premier Boris Johnson insists on his promise to honor the Brexit deadline on October 31, whether with or without a contract. Foreign investors rely on a Brexit decision, regardless of their purchases.

Accordingly, a renewed extension of the deadline would be negative for the stock markets. Fewest companies, especially foreign investors, do not want another hanging party. The uncertainty is now perceived as a greater burden than the consequences of a possible hard Brexit.

In which phase of the cycle do you think the markets are up-to-date?

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And how does it continue? "I think it is likely that the great skepticism among domestic investors in the short term again provide for a setback," says the owner of the analyst analysis house with regard to the behavior of investors. He justifies his opinion with a scenario analysis.

Heibel finds it unlikely that Johnson will get a majority on the Withdrawal Agreement and organize a regulated Brexit in just ten days. If regulated, then only with time extension. Alternatively, after three and a half years, there could be a short process that ends in hard Brexit.

Scenario extension of time

In that case, foreigners would sell disappointed and domestic investors would be relieved to receive the extension. Prices would moderate, as foreign investors are likely to sell faster than residents. This scenario pays tribute to the narrative that prevails in Germany: "A hard Brexit would be devastating and should be avoided in any case". Foreign investors see this differently now.

Scenario hard Brexit

In the case of a tough Brexit, domestic investors would probably do very little, as their skepticism is already reflected in the high cash ratio portfolio. "I find it difficult to estimate the reaction of foreign investors," says Heibel.

Even if they seem to end the game with horror, it would be difficult to imagine that after the price gains of the past two weeks, they would once again make persuasive purchases. "Even with this scenario, a short reset is very likely," he says.

Scenario new proposal

A possibility with an uncertain outcome that does not make it easier to speculate on any of the aforementioned scenarios. "If I look at the developments of recent months, it is likely that the British, to everyone's surprise, presented yet another solution," he says.

Did your expectations for the Dax in the past week come true?

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According to the latest survey results just under one in three investors (32 percent, plus eleven percentage points compared to the previous week) sees the Dax in an upward momentum. A further 18 percent (plus seven percentage points), however, believe in a top education, ie an early end of the rally.

Still 39 percent (minus ten percentage points) expect a higher sideways movement, although the leading index has reached a new high for the past week. Heibel describes the current mood as a "good mood", from overheating or from euphoria, which is an indication of soon falling courses, the situation is still far away.

Mood surveys such as the Handelsblatt Dax-Sentiment, to put it simply, suggest the following: In the case of euphoria, most investors are invested and there is no further demand should prices fall. If extreme pessimism prevails, most investors have already sold, and few buyers are enough to raise prices.

At 52 percent (up ten percentage points from the previous week), most respondents expected most of this development. One in ten (plus one percentage point) indicates that they speculated. On the other hand, only 28 percent (minus seven percentage points) see their expectations of the previous week due to the price development last week as hardly fulfilled. Another nine percent (minus three percentage points) claim to have been caught on the wrong foot.

Which cycle phase do you expect in three months ??

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Conclusion of this part of the survey: Despite the rally on the German stock market, domestic investors are still a little unsure. "I see this as another sign that the rally has been fueled to a large extent by foreign investors," says the Animusx CEO.

Investors are also skeptical about future expectations, they doubt the sustainability of the rally. The number of optimists, who expect prices to rise further in three months, has dropped by four percentage points overall. These investors have moved to the pessimist camp, which believes in topping out in three months.

Overall, the Optimist camp thus houses only one in four survey respondents, but a total of eight percent believe in top education in the next three months. Unchanged 17 percent fear even lower prices in three months. Most expect a sideways movement (plus one percentage point to 45 percent).

Will you trade in the next two weeks?

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According to this burgeoning skepticism, 17 percent (plus six percentage points) of investors now want to reduce their equity positions in the next two weeks, while 21 percent (down two percentage points) still want to buy in shares. At 62 percent (down four percentage points), most investors still have not decided what to do next.

The Euwax Sentiment of the Stuttgart stock exchange, in which private investors trade, commutes around the neutral zero line. There is no clear trend that retail investors speculate in a direction with Dax leverage products.

The pros who trade on the Frankfurt futures exchange Eurex behave quite differently. The put / call ratio has fallen to 1.0, indicating that institutional investors tend to rely on rising prices.

In the US, however, the call / call ratio of the Chicago derivatives exchange CBOE continues to show a rather pessimistic conviction on the part of the professionals. They have bought in the past put options to hedge against falling prices.

Accordingly, US fund managers also remain very defensive with an investment rate of only 57 percent. The cash ratio of asset managers is thus at the highest level of the current year.

The bull / bear ratio of US private investors jumped to 2.5 percent and shows a neutral constitution. The "fear and greed indicator" of the US stock markets, based on technical market data, has a value of 50 in the neutral range.

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