07 / 22


A friendly environment prevailed in July for the financial markets. Bonds and equities recovered somewhat from the worst investment month to date (June), albeit rather selectively. After strong gains in previous months, Chinese markets lost significant ground in July. This was after economic growth fell to its lowest level since the pandemic and renewed reports of a crackdown by Chinese authorities in the technology sector made the rounds. Western central banks continued to raise interest rates as expected. The U.S. Federal Reserve raised its key interest rate by another 75 basis points to 2.5%, the highest level since 2019, and for the ECB it was the first rate hike since 2011. The increase of 0.5% in the key interest rate was higher than the market expected. However, to protect the structurally weak countries (especially Italy) from higher financing costs, the European Central Bank simultaneously launched a new crisis instrument TPI "Transmission Protection Instrument", which allows unlimited bond purchases of the crisis countries. As a result, the highly indebted countries have little incentive to get their public finances under control. The fear of a free-market shakeout dominates the actions of the ECB, which ironically still must hope for temporary inflation with the rather meager increase in the key interest rate. There is hardly any easing in the development of the Ukraine conflict. The Nordstream 1 pipeline is active again, but is running at only 20% of capacity, which exacerbates the energy crisis in Europe. The EU states have agreed on a gas emergency plan, which provides for the curtailment of consumption. If there is a shortage of gas in Europe, especially in Germany, an economic crisis cannot be ruled out. For the time being, the fate of the EU economy seems to be in Putin's hands, who is using gas as a means of exerting pressure in the Ukraine conflict. Despite this background, European shares managed to rally - the fear of a complete suspension of gas flow through Nordstream 1 was greater before. In view of the major problems, the common currency trended very weak and reached parity with the USD for the first time in a long time.

Equity Markets

The recovery was particularly noticeable in the US technology sector. Jerome Powell's cautious comments on the US economy noticeably revived the fantasy of a slower pace by the US Federal Reserve in the future. In addition, the U.S. technology giants reported figures not quite as bad as the market had feared. Although Microsoft missed earnings forecasts, the group still expects double-digit revenue growth for 2023 and thus surprised with a positive outlook in the gloomy environment. Alphabet also recovered deep losses ahead of the earnings report. Despite everything, the two shares are still trading around 15-20% below the respective previous year's price. More disappointing, however, were the figures of Meta Platforms (Facebook), which had to accept a decline in sales for the first time. Apple and Amazon.com rounded off the positive surprises in the technology sector with surprisingly strong quarterly figures. Contrary to all warnings that analysts' estimates are too high, the still young earnings season has been very friendly so far. Jerome Powell was also able to lift the mood somewhat by describing a less than robust US economic picture at the media conference. China's stock markets returned to their usual mode after weeks of outperformance: Renewed regulatory pressure, COVID lockdown fears and heightened concerns about social peace and financial stability sent Chinese markets tumbling. The Hang Seng experienced its worst weeks since March 2020 (monthly loss -7.8%).

Interest Rates

Bond markets recovered strongly due to recession fears. Swiss Confederation bonds are again yielding only 0.4%, after yielding over 1.5% p.a. a few weeks ago. For the upcoming U.S. Federal Reserve meeting in September and November, the markets expect further interest rate steps. However, "jumbo steps" of 75 basis points are probably behind us. However, it is still unclear how much more restrictive monetary policy will have to become to tame inflation. Historically, fighting such high inflation without a recession is an almost impossible task anyway, and the probability that the central bank will provoke one is rather high. The idea of a soft landing is notoriously wishful thinking, and that inflation will quickly return to an acceptable level is not an easy forecast given emerging trends toward supply chain diversification and onshoring (see FOCUS).

Currencies / Commodities

The EUR is the weakest major currency for the month. Against the USD, the common currency lost almost 3% and partly fell below parity. The currency is likely to lose further ground as long as the energy crisis and inflation are not under control. The ECB's too lax policy is widening the gap with the rest of the West, which is much more stressed on inflation.


We remain cautiously positioned in view of the colossal challenges posed by inflation and the war and shifted our relative weights in favor of the US. Despite the consensus expectation of a recession in the major economic areas of Europe and the US, earnings expectations would still be too high, depending on the depth of a possible recession. The traces of inflation are likely to be reflected in consumer behavior only with a delay and Europe faces a possible immense intensification of the energy crisis if not enough gas flows to cover demand over the second half of the year. We also consider the market's expectation of an imminent reversal of the trend in U.S. Federal Reserve policy to be somewhat overhasty, as there is little evidence of a sufficiently cooling inflation trend for the Fed to adopt a more expansive course. Visibility in the current environment remains low. Accordingly, we have reduced European risks and made our stock selection broader and more defensive.


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