June ended the first half of the year on a fundamentally positive note on the financial markets in most places. Economic data in the USA was mainly robust, in contrast to the other regions. The contrast is particularly striking with China, the second largest economy. Persistently weak economic data prompted the Peoples Bank of China (PBOC) to cut interest rates. The economic momentum after the reopening was thus only of a temporary nature and China's government thus has to look for new recipes to get the economy, which is plagued by high debt and deflation, back on track. The previous solution of stimulating the economy through massive investment in infrastructure and real estate was the tried and tested method to remedy the situation in the past. Due to an over-indebted system and persistent overcapacity, this approach is no longer expected to be very successful and restraint is exercised accordingly (see FOCUS). The US Federal Reserve, on the other hand, left the key interest rate unchanged for the first time since the beginning of the increase cycle. At the same time, however, it communicated that key interest rates are likely to rise further later in the year due to persistently high inflation and the strong labour market. The ECB also remains concerned about persistent inflation and raised rates by another 25 basis points to 4%, as expected, while signaling a further increase. Markets are pricing in an 80 per cent probability of another 50 basis point hike by the end of the year. The inflation forecast has also been raised. Parts of Europe have already entered a technical recession based on the latest data. The world held its breath in the meantime as the Wagner Group rehearsed the uprising in Russia at the end of June. Western opinion is divided on the extent of the damage to Putin's system. Putin's position has proved remarkably crisis-resistant over several decades, so it may be premature to proclaim the end of this system.
The Swiss stock market closed the month slightly higher (SPI +0.5%). Further upward momentum was enjoyed by the topics surrounding artificial intelligence and thus the technology stock market in the USA. The European stock exchanges closed near their highs for the year (EuroStoxx 50 +4.3%). Due to the persistently weak Japanese yen, the Nikkei225 also enjoyed a boost (+7.45%, but only 1.8% in CHF). As already mentioned in our mid-month commentary, the hype around AI ("Artificial Intelligence") dominated the news in the corporate world. Virtually no week goes by without one company or another commenting on the topic. The market capitalisation of NVIDIA, the leading provider of computing power for AI-based applications, has already clearly exceeded the trillion mark. Together with Apple, Microsoft, Amazon.com and Alphabet, these five heavyweights in the US market account for a weighting of over 24% of the S&P 500. In the technology-heavy Nasdaq, the 10 largest companies account for over 60% of capitalisation. Historically, such a high concentration is rarely observed in the US market. This year's winners on the US market are therefore primarily large technology stocks. The Dow Jones Index is only +5% higher this year (Nasdaq +39%).
The changes in the interest rate structure were the most conspicuous. The inversion of the 10-2 year US yield curve is taking on historic proportions. The difference between the two maturities is currently over 100 basis points, reflecting the expectation of a recession. In the UK, the yield curve also inverted by a historic 50 basis points to over 85 points in just one month after inflation figures continued to be well above expectation. Higher interest rates are squeezing equity risk premiums, making growth markets such as the US Nasdaq relatively expensive. Especially if interest rates continue to rise due to the still robust US economy, which historically has hardly been positive for the equity markets.
Iron ore and steel prices gained due to weak economic data from China and the accompanying hopes for stimulus measures. Precious metals suffered from higher interest rates. Energy prices such as oil and gas were also in demand, putting the accumulated quarterly losses into perspective. The price of a barrel of Brent oil recorded its fourth consecutive quarter of losses. The Japanese yen stood out with renewed weakness. The Bank of Japan remains the exception in the global interest rate structure and continues to maintain negative interest rates.
Given the deteriorating leading indicators in China and especially in Europe, we maintain our cautious outlook. However, we have to admit that economic development has been surprisingly resilient despite headwinds from tighter credit and higher input costs. The US economy in particular continues to show higher momentum compared to the rest of the world. Nevertheless, the inverted yield curve still calls for caution. As long as it remains inverted, this reflects continued economic momentum and further suggests that a coming recession is not yet imminent. US consumer confidence underpins this resilience with the highest reading since early 2022 to date. However, in our view, equity markets at current valuations are already reflecting the ongoing benign conditions. Sentiment and confidence are already persisting at the upper range. The low implied volatility reflects investors' lack of concern, in addition to the lack of market breadth already mentioned many times, and does not sufficiently appreciate the risks of the balancing act between flawless disinflation, i.e. declining inflation while growth continues. This leads us to remain cautiously positioned until the full extent of the usually delayed effects of tighter monetary policy become apparent and should lead to more attractive opportunities.