Sri Lanka can't pay its debt and gloomy outlook for Germany

Summary:

• Sri Lanka declares default on its foreign debt, roiling the bond market
• Expectations for German economic performance are declining and a gas freeze would cost the economy up to EUR 220 billion
• We explain what impact the French presidential election may have on the stock market
• You'll learn about Apple's commitment to green

The financial market?(2 minutes)

Asia: Why Sri Lanka's default worries us

The Asian island state of Sri Lanka is currently struggling with the worst economic crisis since 1948. The trigger for this was, among other things, the Corona pandemic, because as you surely know, many inhabitants are dependent on tourism. The local people currently lack almost everything:?food, fuel, medicine and electricity. The country is also suffering from high inflation rates.?

To help the people, the state took out more and more loans and also asked the International Monetary Fund (IMF) for help. At the beginning of this week, it became clear that Sri Lanka would not be able to repay the entire debt. As a result, the country stopped the interest payments due and now wants to negotiate with the lenders. China and Japan, for example, each have a 10% stake in Sri Lanka's debt.??

Although Sri Lanka is classified as a developing country, the last few days we could observe that the demand for emerging market bonds declined. These bonds were very popular with investors due to attractive interest rates. Because what you may not know is that in Europe and the U.S., central bank interest rates are at record lows; however, elsewhere there is still decent interest to be had!?In India the interest rate is 4%, in Turkey 14% and in China 3.7%.?

For market participants, the economic development of Sri Lanka did not send a good signal and thus the bonds of other developing and emerging countries also suffered.?If interest rates continue to rise in the future, non-industrialized countries will face difficult times, as this will make loan payments more expensive and thus more difficult. The volatility for bond and stocks ETFs from emerging markets will eventually pick up again.

Germany: Growth forecast lowered and the impact of a gas supply freeze

The leading economic institutes are unanimous in their opinion that Germany's gross domestic product?(all services rendered and products manufactured domestically)?will grow instead?of 4.8% only?by 2.7%.?However, this can be considered a "shift" to the next year, as the forecast for 2023 has been increased. You probably already guessed it: the reason for the lowered GDP estimate is the war in Ukraine and the Corona pandemic. In addition, inflation has its fingers in the pie again: due to high prices, we can buy less from our salary and thus do not contribute to a stronger economy.??

Did this analysis take into account the fact that Germany might stop buying gas from Russia? No. Perhaps you still know the so-called "scenario analysis" from school or university. The economic performance of 2.7% represents the base scenario (i.e. neither a good nor a bad development). This includes the fact that Germany will continue to receive gas from Russia. If Germany were to stop receiving gas from Russia in the future, this would have a negative impact on the calculation and a total of?EUR 220 billion?in economic output could be lost. The gross domestic product would then only grow by 1.9%. So you can see that the German economy is suffering under the current circumstances.

When this news were published, the DAX temporarily sank below the 14,000 point mark, as investors had apparently taken a more positive view of the German economic development.?If you are invested in?the DAX yourself, you should have noticed the decline in your portfolio yesterday.

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What impact will the French presidential election have on the stock market??On Sunday, Macron won the first round of the presidential election, sending a positive signal to the French stock market. On Monday, the hands across Europe were pointing to loss, while the French benchmark index was unchanged. When you look at the different programs of Macron and his challenger Le Pen,?you notice at a stroke that Macron would be better for the markets and the overall French economy.

For example, Macron wants to further develop solar and wind power, while Le Pen prefers nuclear power alone. If Le Pen were to become the new president of France, the country would be confronted with considerable economic uncertainties, the extent of which cannot even be estimated at this point. It is rumored, for example, that?Le Pen would push for France to leave the EU. The stock markets would therefore react negatively to this election outcome in the run-off in two weeks' time.?

Weekly Knowledge?(1 min)

Apple's green commitment.? Did you know that Apple is aiming to become?carbon neutral by 2030? The company is even issuing green bonds to research and implement new technologies. So you can become a lender to sustainable manufacturing opportunities yourself by investing in Apple's green bonds. One example is the?CO2-free aluminum?that Apple plans to use in the production of its new iPhone SE models in the future. In addition, Apple's data center in Denmark is powered by electricity from a?self-built?wind park.?The surplus electricity is fed into the Danish power grid. In total, the volume of green bonds issued by Apple amounts to USD 4.7 billion.?