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After temporary sell-offs, the stock markets in North America, Europe and Asia are on the rise again. As the market technical indicators are mostly positive, there does not seem to be much reason to doubt the confidence of investors. But a closer look reveals that the market now tends to exaggerate the valuation of megacaps. A key factor here is the low interest rate level. The valuation of large growth companies like Alibaba, Amazon, Google, and others depends decisively on the direction in which long-term interest rates develop. The lower the interest rates, the less future cash flows are discounted. Higher valuations are the result.
However, the fact that global long-term interest rates, led by the USA, are falling despite improved fundamentals and increased inflation expectations is extremely unusual and also incompatible with current macroeconomic theory. Obviously, market participants expect the US Federal Reserve (FED) to continue its ultra-expansive course for a very long time to come and possibly even define and defend a "hard cap" on long-term interest rates. This was the last time the FED took this measure during the Second World War to get a grip on the exploding national debt caused by the war. A similar situation is now arising again: spending to combat the economic consequences of the CoViD19 pandemic is likely to push up US national debt to a level similar to that of that time. In the long run, this debt will only remain manageable at low interest rates. Therefore, the expectation that long-term interest rates will continue to be kept down by the FED is not unfounded.
It is also noteworthy that despite the Corona crisis, despite further rounds of sanctions between the USA and China and the upcoming US presidential election, volatility is decreasing. This could be due to the phenomenon that the summer months generally show less fluctuation in price developments because activity on the capital markets is generally declining. However, this carelessness should be over by September at the latest, when the US election campaign enters its hot phase. Since Trump wants to ensure his re-election by all means possible despite a recession at home, it cannot be ruled out that he will try to win over voters with a foreign policy show of force. An increase in geopolitical risks in the second half of the year cannot therefore be ruled out. Investors must therefore expect a return of higher volatility in the markets.