The positive comments by the US treasury secretary have raised hopes that US-China relations will stabilise. Janet Yellen’s recent trip was aimed at repairing ties between the two economic superpowers following the spy balloon incident back in January. This development, along with the fines imposed by the Chinese regulator – which may signal the end of the crackdown on the country’s internet sector – could help to counter the mixed data on China’s economic recovery.
Despite the recent rise in long-term yields, gold prices have held steady. It looks like the consolidation that started in the spring isn’t over yet. We think that, in the medium term, gold prices could be driven more by the dedollarisation of some central banks’ reserves than by interest rates and currency trends.
There was considerable profit-taking on the Euro Stoxx 50 index last week. The sectors that had risen the most since the start of 2023, such as luxury goods and tech, recorded the sharpest declines. This downtrend is not surprising, given the substantial gains recorded so far this year.
USA – green for go
The second quarter of 2023 was marred by the crisis among US regional banks, but investor sentiment soon picked up. There turned out to be little risk of the crisis spreading to major banking groups and the rest of the economy, and the measures taken by the authorities helped to restore confidence. What’s more, the Q1 earnings season proved to be a stellar one after several disappointing quarters.
The market decline in 2022 was caused by investors’ extreme pessimism, amid fears that the US Federal Reserve (Fed) would abruptly tighten its monetary policy – but that all feels like the distant past now. The country’s economic fundamentals remained resilient, and the slight contraction in growth in no way justified such a sharp downturn in stock market indexes. More and more analysts now think that the US economy will make a soft landing – something we have forecast from the beginning – and the markets are starting to price in an economic outlook that is markedly less pessimistic. It is highly likely that GDP growth has already bottomed out and will accelerate in the second half of 2023 and into 2024. This, combined with an upturn in the main economic indicators, will be a boon for equities.
The Fed is now getting ready to adjust its monetary policy in response to fading inflationary pressures and the cumulative negative effects of rate hikes on companies. Whether this means a sustained halt in monetary tightening or rate cuts, the outcome will be good for equities.
From a technical standpoint, the outlook is also bright. In May, the S&P 500 had gained 20% since last autumn, marking the end of the bear market. This kind of scenario often leads to further sharp gains in stock market indexes.
So is it green for go for US equities? We think the 12-month outlook for this asset class is particularly good, but we are less bullish in the short term, given the increasing signs of euphoria among investors. Volatility has dropped off sharply in recent weeks, while sentiment indicators are pointing to extreme levels of optimism. We might therefore see a brief consolidation over the summer, which we would use to up our exposure to US equities.
Disinflation is set to continue
Inflation has been gradually normalising in most industrialised countries. In the US, for example, the figure for Q2 was within the Fed’s long-term target range. In the eurozone, inflation topped out much later but has slowed much faster in recent months owing largely to the steep drop in energy prices from the peaks observed right after the war in Ukraine broke out. After hitting record highs in 2022, European producer price growth has slowed remarkably, and prices are even down year on year.
Most commodities prices are falling, and this is making it more likely that we’ll see disinflation work its way through the supply chain in the next few months, bringing down consumer price growth. That said, neither the Fed nor the ECB appear to be moved by that prospect. This surely has to do with the resilient jobs market, as all economically advanced countries are close to full employment. And with baby-boomers retiring in ever greater numbers, central bank officials may fear the knock-on effects on wages when economic activity picks up again in the coming months. While short-term yields could still go either way, long-term yields appear to be close to – or even past – their highs. We are therefore bullish on long-term bonds, on a global basis but also in the eurozone and Switzerland.
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.
