04 / 23

General

Financial markets continued to be very quiet in April, even though the regional banking crisis in the USA took another toll with the demise of First Republic. The bank represents the second largest demise of traditional commercial banks right after Washington Mutual, which went under in 2008. The slowdown in inflation dynamics had a supportive effect. Even though core inflation rates are still far above their respective target rates, financial markets were relieved to see the trend continue to fall. Central banks will thus continue to adjust interest rates in May. Although the US economy grew less than expected in the first quarter and the regional banking crisis and weakness in the commercial real estate market are significant risk factors, the Federal Reserve will make one last rate hike. New insights into the US labour market will be provided by this week's non-farm payrolls report. Economists expect 180,000 new jobs - the third consecutive decline. The US sovereign debt ceiling is moving closer to centre stage with each passing week. It is estimated that the ceiling may be reached in June and that the US will run out of cash unless the limit is raised. Most market players do not expect a default. The risk is usually only short-term volatility caused by the negotiation process of both parties, which often allows a deal only at the last minute. Record high debt service and the steadily growing debt in the US are likely to colour the debate accordingly emotionally (see FOCUS). The ECB will also raise interest rates by 0.25% to 3.25% in the face of continued stubborn core inflation. In January, the monetary authorities raised the key interest rate by 50 basis points. By June, a further increase of 0.25 percentage points to 3.5% is expected. Japan's central bank left monetary policy unchanged in April and announced a broad monetary policy review. The International Monetary Fund lowered its forecasts for global growth in 2023 and 2024 by around 0.1% each due to the banking stress and the ongoing Ukraine war.

Equity Markets

Thanks to a strong recovery in healthcare stocks, the Swiss stock market showed relative strength in a global comparison. Technology stocks were again in demand on the US stock market after some surprising quarterly figures from Microsoft, Meta and Intel. Microsoft suffered a setback in its intended takeover of the US video game company Activision Blizzard. The British competition authorities blocked the planned deal, which Microsoft intends to contest.  Very good quarterly results were delivered in particular by large European consumer companies such as LVMH and Hermes, which benefited from positive trends in China and the USA. LVMH's market capitalisation exceeded the 500 billion euro mark after the good quarterly results, the first company ever to do so in Europe. The earnings season is still young, but has so far left a surprisingly good impression. It certainly helps that expectations have been lowered. Nevertheless, sales in the USA have so far exceeded expectations by almost 2% and profits by 7%.

Interest Rates

In contrast to equities, interest rates remained at low levels and thus did not share the optimism of the equity markets. Before the banking crisis hit, the yield on 10-year US government bonds was still over 4%. Today it is less than 3.5%. Swiss Confederation bonds (10Y) still yield just over 1% p.a.. Markets continue to expect significant interest rate cuts (USA) from the 3rd quarter of 2023. The yield curve has also inverted further in the USA. The last time the spread between 3-month and 10-year interest rates was as negative as it is today was in 1981 before the great US recession. The US recession between 1981 and 1982 was one of the most severe recessions in the country, provoked by high inflation and the subsequent high key interest rates of the US Federal Reserve. Unemployment peaked at over 10% in 1982 and GDP slid by 3%. The government had to introduce austerity measures to reduce the budget deficit. Even today, the US budget deficit is very high and is likely to be controversial soon on the occasion of the debt ceiling (see FOCUS).

Currencies & Commodities

Precious metals enjoyed a further boost after the already strong push in March. Silver gained another 4% and gold 1% against the USD. However, psychologically important marks could not be sustainably broken through, which suggests further consolidation in the coming weeks. After a long dry spell this year, the oil price rose slightly for the first time (+1.5%). The Japanese JPY was the major loser among the G10 currencies after the first interest rate decision under Ueda San. The Australian dollar and the Norwegian krone were equally weak against the franc.

Outlook

The cautious outlook presented in March is still fully valid today. Rising interest rates will leave their mark on the growth outlook. Although historical parallels are no guarantee for future developments, they do call for caution with regard to the coming development of the global economy. The uncertain outlook coupled with unfavourable equity valuations (especially in the USA) continue to recommend caution in riskier investments. Caution also because higher interest rates can only have a braking effect on inflation and the real economy after several months and until then the financial market will continue to oscillate in a naïve calm.

 

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