As fears of a financial crisis fade, there has been some profit-taking on gold, which is now trading back below USD 2,000/ounce. This consolidation will help to rein in investors’ high level of optimism towards gold, potentially paving the way for new record highs.
The economic readings published in China last week confirm what high-frequency data have been telling us recently. The recovery is being driven by the services sector, with retail sales up 10.6% year on year in March. Unsurprisingly, growth in the manufacturing sector slowed in the first quarter due to weaker demand from developed countries.
The eurozone’s purchasing managers’ indexes once again came in unexpectedly strong, with services more than offsetting softness in the manufacturing sector. This shows that there is still some post-pandemic pent-up demand in certain segments of the services sector, such as travel. This rosy outlook will give the European Central Bank an argument to keep tightening its monetary policy.
USA – investor confidence takes another hit
2023 got off to a good start in the US, but the collapse of several regional banks sparked a crisis of confidence that undermined investors’ already-fragile morale. The S&P 500 was pretty much back to square one at the end of March, having gained almost 10% in early February. There’s no widespread solvency issue with US banks; instead, investors have lost confidence in some smaller banks that were hurt by regulatory failures and the US Federal Reserve’s sharp tightening of monetary policy.
These events are unlikely to lead to a financial crisis like the one we experienced in 2008, but they could very well exacerbate the ongoing slowdown in the US economy. It’s worth remembering that the slowdown has brought inflation back to more normal levels, and that trend should pick up this quarter.
US GDP growth should be lacklustre but remain positive this year. Corporate earnings are likely to level off or even decline slightly for several quarters in a row, but the end of the tunnel is in sight. Economic activity could begin to pick up as early as the second half of this year, with earnings once again beating the consensus forecasts, which are still a little too high but are normalising. In addition, the current round of monetary tightening is nearing an end, and investors expect Jerome Powell to keep policy rates as they are for a while.
The stage is gradually being set for a stock market rally, and investor optimism has been on the rise since early April. What’s more, the current earnings season is going well in the US and shows that analysts’ expectations have bottomed out at a realistic level in the light of recent economic indicators. We’re maintaining our constructive stance on the US economy and our neutral stance on risk assets in the region. We will, of course, increase our exposure if our forecast proves accurate in the second quarter.
Interest rates have passed their peak
Central banks are hardly in a position to tighten their monetary policy any further. Stresses within the global banking system, which have already brought down banks in Europe and the US, suggest that it is time for central banks in the developed world to step back from fighting inflation and focus on the health of the financial system instead.
The prices of staple foods have receded, although some producers, intermediaries and distributors are still seeking to make the most of the current environment by boosting both prices and margins – on food products in particular – after many years of price stability. Overall, however, disinflation appears to be well under way and will only gain further traction as lending conditions tighten in the wake of new cracks in the banking sector.
This spring, long-term sovereign yields should begin to fall in anticipation of the upcoming peak in policy rates. One- and two-year government bonds, which are usually more sensitive to economic and financial developments, have already begun to lose ground after hitting multi-year highs back in March.
Despite recent uncertainty, corporate bonds should fare nearly as well as higher quality bonds. Average debt levels among corporate issuers are reasonable in historical terms, and many of them took advantage of the recent low interest rate environment to fund their activities at very long-term maturities, both in the US and Europe.
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.
