The market distortions triggered by geopolitical concerns have already been made up again in March. Markets in the U.S. or in Switzerland are even trading higher than before the Russian invasion of Ukraine. The situation is worse for global bonds - the trend reversal continued, marking rarely seen price losses of almost 12% since the high in January 2021. The prospects of peace negotiations brought investors back into equities. Central banks nevertheless began unwaveringly to implement the long overdue tightening of monetary policy. Since the outbreak of the pandemic, inflationary pressures in the G10 countries have tended to be underestimated. Monetary authorities are now trying to close the gap (see FOCUS). The U.S. Federal Reserve raised its key interest rate by 25 basis points for the first time since 2018, citing persistently high inflation and an uncertain outlook due to the war as reasons for an uncertain economic outlook. Verbally, Jerome Powell let slip that a faster tightening could well be appropriate. Currently, interest rate steps of 50 basis points are even expected on the next two interest rate dates. The ECB now also wants to act faster - the money market is expecting four interest rate steps in the next twelve months. A decline in growth below the trend growth rate of 1-2% would certainly suit the central banks in their fight against high inflation - but so far there are few signs of this. However, high commodity prices will certainly weigh on global growth. The Japanese central bank bucked the global trend by maintaining its very loose stance and signaled that it would buy unlimited amounts of bonds to cap 10-year yields at 0.25%. With another stimulus package worth 813 billion. francs, the Japanese government has also decided to alleviate the consequences of the price increases exacerbated by the war.
The stock markets trended stronger, particularly in the USA and Switzerland. Defense stocks benefited from the Europeans' commitment to invest more heavily in defense. The Chinese stock market showed record fluctuations. First, the Chinese market lost significantly due to concerns about entanglements with the Russian war campaign as well as the unremitting regulatory interventions, before it recovered massively thanks to concessions by the government. Chinese Internet stocks lost more in the 13 months prior than U.S. tech companies did during the dotcom bubble. Alibaba's stock posted its biggest daily gain (+36.7%) since its IPO, but remains down over 8% for the year. Japan's Nikkei225 bullish by over 4%. The Swiss stock market gained +2.4%. The Russian stock market resumed trading after a record-long almost one-month break. Since the beginning of the year, the index has lost over 35%.
Global bonds lost across the board: 10-year U.S. Treasuries reached an interim expiration yield of 2.55%. Swiss government bonds yielded 0.54% at the end of the month. The US yield curve is inverted at different maturities. Inverse yield curves often point to a recession in the coming months.
Due to the very loose Japanese monetary policy compared to the global trend and the additional immense government stimulus measures, the Japanese yen depreciated significantly. Against the USD, it was as weak as it had been since 2015, and against the Swiss franc the yen cost less than 75 Swiss cents at times. Commodities continued to rise almost without exception. In particular, the price of energy materials such as gas (+27%) and oil (+4.7%) continued to climb inexorably. Precious metals were only little strongly sought (gold +1.5%).
The outlook remains very gloomy due to the difficult-to-predict inflationary tendencies, which are reinforced by the war. In terms of monetary policy, the tide has clearly turned - global central banks will visibly withdraw liquidity from the market in order to bring inflation under "control". This is not an optimal environment for equities, but even less so for bonds. We therefore favor equities over bonds and diversify within equity investments across defensive sectors that have sufficient pricing power. Precious metals offer protection against further geopolitical escalation and inflation shocks. A tactically overweighted liquidity ratio continues to make sense in view of the acute risks and still high valuations of financial assets.