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General

Markets remained positive in November. The central narrative is therefore focused on a slower pace of global monetary policy tightening thanks to easing inflation rates. Although published inflation figures remained at surprisingly high levels in November, the momentum has waned. In the US, inflation was 7.7% in October instead of the expected 7.9%. However, the FED's preferred core inflation rate rose more than expected. In Europe, too, there were positive surprises at a high level - in both Germany, at 10%, and Spain, at 6.8%, inflation was well below expectations. This supported the financial markets in their further recovery. Not only the inflation data managed to overturn the previously pessimistic sentiment, but also the growth figures - German GDP, for example, grew much stronger than expected at 1.2%. But also in the US, consumption and economic activity remain robust (annualized US GDP +2.9% in the third quarter). Accordingly, the tightening round initiated by the central banks has not yet led to a significant weakening of the global economy. However, if we look at various leading indicators, they are still very cautious. While consumer confidence is still robust, on the other hand, purchasing managers' surveys paint a less than uplifting economic picture for the months ahead - the S&P Global US Manufacturing PMI fell to 47.6 in November, the lowest level since the pandemic, pointing to a contraction in economic growth in the months ahead. The U.S. consumer is also likely to have slowly exhausted the savings accumulated during the pandemic, and likewise, under pressure from higher interest rates, is no longer the same support for the U.S. economy that it has been in recent quarters. Also, presumably with higher interest rates, people are beginning to rethink the amount of debt they can sustain in the future, whether privately or at the government level (see FOCUS). The U.S. Federal Reserve will therefore switch to a slower tightening course and in all likelihood raise interest rates by another 50 basis points in December, after raising the policy rate by a steep 75 basis points at each of the last four meetings. The market expects the record-breaking interest rate tightening cycle to peak in June of next year, 2023, and such an aggressive interest rate policy will lead to a slowdown in the global economy, leaving skid marks in its wake. In the crypto market, the bankruptcy of one of the most important trading platforms so far "FTX" caused a stir. The dislocations in the crypto market were limited: The overall crypto market and the extent of institutional investors' involvement is likely to be too small to result in macroeconomic consequences. After the latest dislocations, the market value of crypto assets is still around 760 billion USD (at its peak it was 2.8 trillion USD). This value appears very small in contrast to the 12 trillion USD in the gold market, 36 trillion USD market capitalization of the S&P500 or 326 trillion USD in the global real estate market. In the US midterm elections, the Republicans failed to achieve the expected large majority. The Senate remains surprisingly but narrowly in the hands of the Democrats. Despite the absence of the hoped-for landslide victory for the Grand old Party ("GOP"), Donald Trump announced his entry into the next presidential election in 2024.

Equity Markets

Daily changes in the stock market were once again breathtaking. After the slight easing on the inflation front, the Nasdaq100 index gained a whopping 7% and ended the month +5.5% up. The comparatively low valued and more cyclical stocks in Europe closed significantly higher (EuroStoxx50 +9.6%). Here, better-than-expected economic data and the easing of Chinese monetary policy helped. Chinese equities built on hopes for the end of COVID restrictions as well as stimulative monetary policy from the central government and only just recouped the losses of the past two months with a rise of over 26% in November. The defensive SMI gained 2.8%. Meanwhile, investor sentiment tends to point to an overly exuberant mood. Survey data and money flows indicate that only a few are still skeptical about the recent recovery - despite the fact that the earnings yield of U.S. equities is virtually on par with government bond yields. We remain in the cautious camp here and, for the time being, consider the recent recovery to be unsustainable.

Interest Rates / Fixed Income

With inflation in Europe slowing for the first time in 1.5 years, there is hope that the ECB may have the upper hand in the fight against inflation. While this is only an initial data point, it certainly provides relief to the ECB's Governing Council, which has consistently and massively underestimated inflation. As mentioned, the FED also has a bit of a tailwind from the inflation data and is likely to gradually slow the pace of rate hikes. Nevertheless, interest rates remain elevated relative to the valuation of equities and the relative attractiveness has improved with this adjustment in the U.S., especially in favor of bonds.

Currencies / Commodities

The USD was the weakest G10 currency of all. Against the CHF, it lost over 5%. After the high priced-in interest rate expectations were adjusted with the lower inflation and also Powell emphasized that smaller steps are appropriate. Gold, silver, copper and aluminum were all very strong. The price of oil, however, came back about 5.5% due to demand concerns.

Outlook

Only a few trading days remain for 2022, which will again be a very eventful year. We believe that we will see a rather quiet end to the year on the financial markets, but we find few interesting opportunities, at least in equities, after the recovery that has taken place. The markets do not reflect the lurking recession risk and are currently focusing too one-sidedly on the only slightly flattened inflation, while analysts have also hardly adjusted earnings expectations to the changed conditions in our opinion. Earnings expectations for 2023 will have to be revised downward. Equity market valuations, especially in the U.S., are highly unattractive relative to bonds in a recessionary scenario and thus vulnerable to a renewed correction. In bonds, on the other hand, we have been repeatedly active in the primary market in recent weeks and have participated in high-quality issues. This has increased our exposure to fixed income. We will explain where we see longer-term opportunities in our next market commentary for December 2022. You will find it on our website as usual in January. We wish you a happy holiday season and a successful start to the new, and probably no less exciting, year 2023.

 

Focus Market Forecast