09 / 22

General

Global financial markets suffered from heavy selling pressure in September. Bonds and equities fell sharply virtually in tandem as inflation data in the U.S. was again stubbornly high and the United Kingdom, under its new leadership, announced massive tax cuts. There was no shortage of record-breaking moves on any front. More than $60 trillion in value has been wiped out globally since the start of the year. United Kingdom 30-year government bond yields (GILTs) spiked as high as 5% at times before the Bank of England promised unlimited intervention. These are extraordinary times in which, on the one hand, a fight against inflation is being waged and, on the other hand, governments have no inhibitions about running high deficits. Such conditions as are found in Europe, and especially now in England, destroy confidence in the currency. The British pound slipped to a record low against the Swiss franc, the EUR reached a new low for the year against the franc and a new record low against the USD. Central banks raised interest rates as expected. Japan is an exception among the G10 countries. The Bank of Japan continues to shy away from normalizing monetary policy, yet the Japanese yen is weaker than it has been in several decades. More rate hikes are expected by the end of the year: in the U.S., Europe and Switzerland. The US Federal Reserve is expected to tighten rates by a further 50 basis points in both November and December. The geopolitical situation reached the next level of escalation with the announcement of mobilization in Russia and the annexation of southeastern regions of Ukraine. Economic data show a mixed picture based on the overall data situation. Leading indicators tend to point to a slowdown in growth, while the lagging labor market looks very robust. Higher interest rates are now also impacting house prices in the U.S. and Europe. Although house prices in the U.S. remain comfortably above year-ago levels, they lost between 2-3% in July in major U.S. cities such as San Francisco and Los Angeles. On a monthly basis, this is the largest setback in such a short time for the broad Case-Shiller index, which includes the twenty largest cities in the US. A decline in housing prices should be welcome to the Federal Reserve in its mandate to fight inflation. Similarly, oil and gas prices fell in September. However, this easing is likely to show up only very slowly in the inflation data, so the Federal Reserve is unlikely to adjust its interest rate policy in the immediate future.

Equity Markets

The downward trend on the equity markets accelerated significantly once again. The losses were extreme worldwide and many of the world's markets fell below their lows for the year. Once again, growth-oriented indices such as the Nasdaq (-11%) or developing countries such as China (-7%) suffered most. The Hang Seng even slumped by over 14%. The SMI lost 5%. Analysts' earnings expectations are only slowly being revised downward. Wall Street still expects on average profit increases of 8-10% in the coming year - in view of the increasingly likely recession, this seems overoptimistic and illusory. Parcel delivery service FedEx shocked investors with a massive earnings disappointment - profits at the US blue-chip company, which is sensitive to the economy, slumped by over 20% - in contrast, growth of 18% year-on-year was expected. The CEO blamed the economic slowdown for the poor results and immediately shared that he expects a global recession. The company immediately announced cost cuts and refrained from giving an outlook for the coming year. Other blue chips such as Oracle, Nike and Adobe disappointed investors in the same way. There were also sober figures from US Steel or Nucor from the previously very popular steel industry.

Interest Rates

Bonds fell in a crash-like fashion until the Bank of England intervened. The yield to maturity of US Treasuries (10 years) jumped from just under 3.2% at the end of August 2022 to 4% at times (which corresponds to a loss of around 7% within one month!). This means that classic strategy portfolios, which invest in a balanced way between equities and bonds, are having a particularly hard time this year. The Pictet25 Index, which reflects the return of 25% equities and 75% bonds worldwide, has lost over -15% to date and is thus approaching the worst loss in value since the great financial crisis of 2008.

Currencies / Commodities

Economic concerns pushed the oil price below USD 80 (WTI) at times. Despite fears of recession, the price of energy remains very high, which is not only due to the war in Ukraine (see FOCUS). The Swiss franc was again very strong and gained almost against all major currencies except the USD.

Outlook

We may be slowly approaching a point at which the global decline in the value of financial assets could prompt the U.S. Federal Reserve in particular to pause for thought. Although the Fed will probably not be able to make a strong U-turn yet due to the high reported inflation and the still strong labor market, the slightest hint of a slightly more relaxed interest rate policy is likely to cause an interim recovery on the stock markets after the immense price losses in September. However, we believe that the increasingly likely recession in the global economy means that we have probably not yet seen the bottom of the stock markets. The high earnings expectations and the ongoing restrictive monetary policy argue against a strategic overweighting of equities. However, from a purely tactical point of view, the very negative investor sentiment, together with the first players in monetary policy to "counteract", could provide some fertile ground for an interim recovery into the end of the year. Temporarily, we could therefore participate a little less in such a recovery with an equity underweight.

 

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