Market Insights - April 3, 2023

Swiss inflation fell by more than expected in March, coming in at 2.9% compared with 3.4% in February. Core inflation, which excludes food and energy prices, stood at just 2.2%. This should enable the Swiss National Bank to ease up considerably on its rate hikes in the second quarter, or maybe even put its tightening on hold.

Unsurprisingly, China’s recent economic rebound has not been felt evenly across all sectors: while the services purchasing managers’ index (PMI) exceeded 58 in March – its highest level since 2011 – the manufacturing PMI dropped below 52. This reflects the sharp uptick in the services sector and domestic consumer spending but slowing demand for Chinese exports.

As a result of the decline in energy prices, eurozone inflation dropped to 6.9% in March, which was lower than forecast by most economists and investors. This good news could prompt the European Central Bank to slow the pace of its rate hikes, although core inflation is still high.

Banking sector tensions prompt mone-tary policy turnaround

There has been no shortage of financial turmoil in recent economic history. These crises have often been connected to the US Federal Reserve’s moves to tighten monetary policy. When the Fed reins in lending conditions, the weakest components of the financial system often come undone. Some of the most fragile financial institutions have paid the price this time, first in the US and then in Switzerland. As in the past, these bank collapses will most likely put an end to the Fed’s tightening. Now that disinflation is well under way in the US, Jerome Powell can justifiably turn his focus to the health of the banking system – especially since commercial banks are already tightening their lending conditions, which will quickly start to weigh on the economy.

While US manufacturing has begun to slow this year, services have so far been holding up well. This is mainly because the labour market is robust and wages are rising, although the sharp drop in energy prices has also helped, as it has eased the pressure on consumers’ wallets. Switzerland, and Europe more broadly, are also experiencing this diverging trend in manufacturing and services. Europe is very exposed to China, the world’s second-largest economy, so it should be boosted by the uptick in growth there, where the zero-COVID policy and repeated lockdowns are gradually becoming a thing of the past.

We think that the current financial crisis will remain contained – although we will be paying close attention to premiums on credit default swaps – and we still hope to see the global economy pick up in the second half of the year. If that happens, stock market valuations will head upwards, which is why we’re still relatively overweight on equities, with a preference for high-quality stocks and sectors.

In addition, long-term bond yields have clearly peaked, and the outlook is currently bright for the fixed-income market. We think the US dollar, which has been heading downwards for several months, will continue to lose ground as its currency premium starts to erode. Unlike the Fed, central banks in Europe have not yet decided whether to keep fighting inflation or focus on financial stability, which means they could end up tightening monetary policy more than is needed.

Commodities – sentiment is overly bearish

The energy market remains depressed: gas is trading at around USD 2 per MMBtu – a level it has reached only twice in the past 20 years – while oil prices are struggling to stay above USD 75. In our view, sentiment on the oil market is overly bearish. Various analyses show that oil prices should only decline that much if investors expect an imminent recession and a rise in oil inventories.

Our economic outlook is less pessimistic. We expect growth to pick up later this year once the economy moves past what we consider a temporary slowdown. Adjustments are starting to be made on the supply side, with Opec announcing surprise output cuts at the weekend. It looks like oil prices have reached a level that oil-producing countries consider too low and not in their interest. We therefore think that prices will start to rise or at least stabilise, and that oil still holds upside potential.The story is very different for gold.

Thanks to the precious metal’s safe-haven status, gold prices are back at the highs seen at the start of the war in Ukraine. Investors may be tempted to take profits after this sharp rise, but we think it’s still too early. Central banks continue to diversify their reserves by buying gold, yet private investors are more circumspect. Capital flows into gold ETFs have indeed been quite low. We are therefore maintaining our exposure to gold as an economic hedge.