Market Insights - July 4, 2022

Bitcoin ended the quarter down 58%, its second-worst performance ever. This is partly because of the US Federal Reserve’s rate hikes. But it is above all because several bankruptcies have made market players more susceptible to counterparty risk.

Eurozone inflation is still coming in higher than expected. It jumped more than forecast in June, to 8.6% year on year – an all-time high. The European Central Bank now faces the difficult task of reining in inflation by hiking rates without pushing the eurozone into recession.  

The latest purchasing managers’ index readings suggest that economic activity is picking up in China, now that COVID-19 restrictions have been eased. Both manufacturing and services PMIs have passed the 50 mark, the first time output has expanded in four months. This confirms the trend seen in high-frequency data and in investor optimism.

All eyes are on inflation

In addition to the surge in food prices, which looks set to last, soaring energy prices have become a serious problem – they have directly impacted individuals’ and companies’ purchasing power, and the increase in transport costs has had a knock-on effect on the prices of other goods. Central banks are well aware of the risk of long-term inflation, and most have taken decisive action by raising key rates and reining in borrowing, at the risk of seriously undermining growth and bringing the macro cycle to an early end. But there are increasing signs that prices are levelling off. The many bottlenecks affecting supply chains since the COVID-19 pandemic are gradually starting to clear, which has reduced delivery deadlines and brought down the cost of goods. If it sets in, this easing of inflation could lead to a soft landing for the global economy and extend the current macro cycle.  For the time being, consumer spending is holding up pretty well in developed countries – people have been building up considerable savings since 2020 and unemployment is close to its all-time lows. China is a whole other story, however: Beijing has brought in a raft of measures to boost growth after the slump caused by the spring lockdowns. In Europe, we will be keeping a close eye on what happens if Russia cuts off its gas supplies and how this will affect consumer and business confidence. We expect inflation to ease over the summer, which should calm fears of a global recession and provide a boost to the financial markets, which had a particularly tough time in the first half of 2022. Both stock and bond valuations have dropped back to attractive levels, and some fixed-income markets are at last offering attractive returns. That is the case for the US market, as well as for Switzerland, where interest rates had been negative for years. We recommend investing in Swiss bonds again and have increased the Swiss franc’s weighting in all our investment profiles, since the Swiss National Bank no longer seems set on reining in the franc. We have, however, reduced our exposure to pound sterling. That’s because the UK economy is struggling to get passed Brexit, and Boris Johnson’s government is becoming weaker by the day.

Commodities – a more selective approach is needed

Commodities posted very strong gains in the first half of the year, particularly in comparison with other risk assets. In the wake of this solid rebound, some investors are already wondering whether prices have peaked. We don’t think commodities have fully caught up, after a long period of underperformance that gave rise to problems of underinvestment. But price rises are unlikely to maintain the same pace without first going through a consolidation phase.

Oil and other energy sources remain our preferred commodities. Global supplies have consistently fallen short since the start of the year. Of even greater concern is the fact that Opec has failed to meet its production targets at a time when it is being counted on to keep the market in balance. At the same time, demand continues to normalise. And now that Beijing has shortened quarantine times, Chinese demand is poised to expand. Given that inventories are low, we would not be surprised to see oil prices rise so high that they start to weigh on demand. In light of these factors, we still recommend buying oil on the dips.

The situation is more complicated for industrial metals. This market segment maintains strong long-term appeal, as the energy transition will create significant demand. In the short term, however, the macro cycle will predominate. Given the current slowdown, we are more cautious on these assets, which have done very well since our buy recommendation in early 2020. Once visibility improves, we will not hesitate to jump back in.

Despite widespread uncertainty, gold is lagging behind other commodities. We are maintaining our exposure to gold for hedging purposes, in the event the stock market environment weakens further.