Oil prices continue to rise, spurred by the decline in US inventories. They have surpassed USD 82 per barrel, their highest level since November 2022.
Although the eurozone’s stronger-than-expected economy has allayed fears of a recession in the region, Sweden doesn’t seem to have been able to avoid one. That’s because household debt levels in the country are very high, which makes consumers more vulnerable to rising interest rates. This, in turn, has weighed on consumer spending, with retail sales plummeting 9.4% year on year in February.
US inflation is now returning to normal levels more quickly. It came in at 5% in March, which was just below forecasts. Inflation will continue to ease, as economic activity is clearly slowing in the country. The US Federal Reserve is nonetheless expected to raise rates again in May before putting an end to its monetary policy tightening.
China – a new phase in the recovery process?
After the collapse of SVB in the US and UBS’ forced buyout of Credit Suisse here in Switzerland, it might seem like the Asian markets have had a relatively calm couple of weeks. But looks can be deceiving – economic activity is very much on the rebound in China. Indicators ranging from mobility and retail sales to property transactions and cinema attendance are all on the rise in China, suggesting that the country’s economic recovery is in full swing.
What’s more, the Chinese government clearly wants this recovery to happen. It has eased up on its regulatory clampdown on online companies and the property sector. It has also begun approving video game licences again after a one-year hiatus and lowered the reserve requirement for banks in order to pump more liquidity into the financial system. In short, Beijing has rarely been so determined to shore up the economy.
So why is it that the Chinese stock market has lost ground since February? The answer is simple: the string of good news has not been enough to heal the scars left by the pandemic, and consumer confidence has been slow to pick up. It’s also possible that pessimists have interpreted the government’s 5% growth target as a sign of insufficiently aggressive stimulus rather than as a sign of caution.
Initially, the stock market rallied in November because valuations had returned to more normal levels. Now corporate earnings growth should become the main driver of the market upturn, after a short bout of profit-taking in February. It’s also worth pointing out that earnings growth forecasts for 2023 and 2024 are much higher for China than they are for other regions.
In any case, it is still far too early to say that the effects of China’s reopening are behind us. And the more confident investors become, the more the economic upswing will be reflected in the stock market’s performance.
Foreign exchange – the greenback is losing ground
Following the collapse of three second-tier banks in the States, the Fed appears to more fully appreciate just how vulnerable the US banking sector is to its sharp rate hikes. Although the Fed raised its rate by a further 25bps at its most recent meeting, the accompanying press release seems to suggest that the current round of monetary tightening has come to an end.
The European Central Bank (ECB), which is grappling with considerably higher inflation, continues to tighten its monetary policy in the hope that the region’s financial system can withstand it. The Swiss National Bank, in the face of persistent inflation in Switzerland, is taking its cues from the ECB despite the failure of one of the country’s two largest banks.
If the current systemic risks subside soon, the US dollar’s premium relative to European currencies could narrow. After its standout performance over the past two years, the greenback seems likely to fall back into line and resume trading at levels seen in the latter half of the previous decade. Among the main currencies, the euro currently appears most likely to outperform. However, more exotic currencies – such as commodity and some emerging-market currencies – could also get a boost from a softer dollar.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
