Fitch has lowered the USA’s credit rating to AA+. Moody’s is now the only major ratings agency to keep its top rating (AAA) on US debt. This news had largely been priced in and has had little impact on the bond market.
The Bank of England (BoE) has raised interest rates by 0.25 percentage points to 5.25%, as wage growth is still strong and inflation has not abated in the services sector. And this probably won’t be the BoE’s last hike in this round of monetary policy tightening. The UK markets were unfazed by the announcement, which suggests that it had already been priced in.
US quarterly earnings reports have been much better than expected, with more than 80% of S&P 500 companies beating analysts’ forecasts. This is another sign of the country’s economic resilience and shows that we were right to forecast a soft landing for the US economy.
Central bankers will soon be ready for a break
The US Federal Reserve seems to have got the job done. Its latest rate hike could well be its last for now. Inflation has dropped back to the rate targeted by Fed Chair Jerome Powell, and the labour market is also gradually easing. In July, the US economy created three times fewer jobs than in the same month of the prior year. The threat of a wage-price spiral seems to have faded.
The European Central Bank is not quite done with its current round of tightening, as inflation is still too high in the eurozone. The dollar’s short-term interest rate differential, which has for a long time worked in the greenback’s favour, is likely to start to narrow against most currencies, particularly the euro. This will make it harder for the US to attract the capital it needs to fund its ever-growing current account deficit.
So even though it rallied briefly in the spring, the dollar is likely to continue to lose ground, including against the Swiss franc. At 1.6% year on year, inflation is back in the Swiss National Bank’s comfort zone, but the country’s central bank is still toying with the idea of raising rates again in September in response to future rent rises and the upcoming increase in electricity prices, which could cause inflation to jump again in 2024. However, the downward slide in the country’s leading economic indicators (such as the PMI) in July could persuade Thomas Jordan that a strong Swiss franc might derail Switzerland’s economic recovery.
Commodities still volatile
After peaking early last year, investors’ enthusiasm for commodities waned in the first half of this year. Exposure may still be above the lows recorded between 2013 and 2016, but this sector’s appeal to investors has again receded significantly. It’s clear that the worst-case scenario was avoided and the feared shortages in 2022 are a distant memory, but we think investors are underestimating the sector’s fundamentals. In our view, the underperformance in the first half of the year was not justified, and the recent rebound still has further to go.
Agricultural commodities are a good case in point. Prices shot up when Ukraine was invaded but have gradually decreased to below pre-invasion levels. Yet the threat of a dry summer in the US was enough to drive prices back up by around 20%. This is a traditionally volatile season, and a very cautious stance will only accentuate that trend, particularly given the uncertainty surrounding exports from the Black Sea region.
In the energy sector, low prices also reflect fears – driven mainly by the prospect of a recession – that demand will falter. We still don’t think that scenario will materialise, and we expect consumer spending to expand as the economy picks up. In July, robust demand and better discipline among
producers prompted investors to rethink their approach, and oil prices rose by more than 10% as a result. We therefore remain bullish on oil, which is still cheap in the current economic environment, with investors’ exposure remaining moderate.
The trend in gold, however, is very different from in previous cycles. The uptick in prices early this year was not fuelled by private investors but rather by central banks seeking to diversify their reserves. That was enough to nudge sentiment indicators into overbought territory, but we see little downside risk given the small number of potential sellers.
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.
