Financial markets were mainly friendly on the surface in March, but rising interest rates and the associated increase in the USD dominated the overall picture. Under this influence, emerging markets tended to be very weak. Likewise, the outperformance of value versus growth sectors continued. In Switzerland, Credit Suisse was the main focus of coverage due to renewed involvement in risky transactions. The bank announced that losses from the bankruptcy of the US hedge fund Archegos are likely to have a significant impact on its first quarter results. Estimates are for losses of between USD 3-4 billion, which does not include the expected losses from the Greensill Funds. At the end of the month, US President Biden outlined his planned USD 2.2 trillion infrastructure program called "Build-Back-Better". For example, 650 billion USD will be spent over 8 years on roads, ports and bridges. Financing could be obtained by raising corporate taxes from the current 21% to as much as 28%. Despite the Democratic majority in Congress, these plans will not be easy to implement, especially if the economy continues to brighten, as currently appears to be the case. The Fed will be increasingly challenged on its current argumentation of ultra-expansive monetary policy as economic sentiment remains strong, especially if job creation continues to recover and inflation overshoots the target. The Fed will have to do a balancing act and increasingly control interest rates at the long end and, at best, tighten the reins somewhat at the short end.
Thanks to a revival of the defensive heavyweights Roche, Nestlé and Novartis, the Swiss stock market gained 5%. Asian markets such as China, on the other hand, lost significantly (-5%) due to the strengthening USD and the US equity market gained around 5.5%. The liquidation of the Archegos hedge fund temporarily caused higher volatility and panic in the overall market. Put/call volumes as well as the VIX jumped, albeit briefly, to weekly highs. This is the largest known margin call of all time. Because of the recent sharp rise in interest rates, tech stocks are so unpopular with speculators that short positions in the Nasdaq100 have reached their third highest level in three years. Such positioning levels are often a contra-indicator of a trend reversal in the corresponding stock. It is quite possible that the Q1 earnings reports will attract investors back somewhat into the fast-growing technology stocks - a great many companies in the IT sector have raised their forecasts for the first quarter. Profits in the technology sector are expected to grow by over 22%, but despite this expectation, stocks in the sector have been unable to rise much more as rising interest rates have overshadowed growth prospects.
The rise in long-term US interest rates continued unabated in March. At times, the 10-year US Treasury reached a high of 1.77%. The US (10-2) yield curve is thus as steep as it last was in 2015. In Europe, interest rates remained below the February highs thanks to clear central bank rhetoric. The resulting increase in interest rate differentials between the USD and other currency regions led to a strengthening of the USD. Jerome Powell did little to reassure the bond markets on the occasion of the interest rate decision. While he assured that the Fed would maintain the course of expansionary monetary policy despite a robust growth and inflation outlook, he missed the opportunity to calm investors' nervousness at the long-term end.
The CHF depreciated significantly against virtually all currencies. The winners were the Canadian dollar (CAD), the British pound (GBP) as well as the Norwegian krone (NOK) and the US dollar (USD) - see FOCUS. The strong USD and higher interest rates were poison for gold (-1.5%) and silver (-8.4%).
The outlook for equities is likely to remain positive in April under the current circumstances and the upcoming quarterly figures. As usual, we believe that earnings reports are likely to support the equity market. Furthermore, it is interest rates as well as market breadth and investor sentiment that are likely to lead the way in the coming weeks on a reduction of equity risks. Investor sentiment based on the surveys has already returned to very high levels. This also applies to the survey values of the global industrial and service sectors. We are therefore examining a reduction of risks over the coming weeks by means of options or direct sales.