The S&P 500 has run up against major technical resistance levels. Solid corporate earnings in the US have boosted investors’ confidence, but for the stock market rally to continue we think the debt ceiling crisis will need to be resolved soon. Once that risk has been averted, US equities could start heading upwards again.
The grain market has come under pressure this year, with prices down by over 15%. Despite the war in Ukraine, exports from the Black Sea region have remained strong, allaying fears of potential shortages. Only an early start to the El Niño effect is likely to hamper this trend in the short to medium term.
Talks to raise the US debt ceiling are ongoing. We still think a last-minute deal is the most likely outcome. Both sides have taken a constructive stance, which means there is room for mutual concessions.
“Greedflation” has passed its peak
A significant proportion of today’s consumer price growth can be put down to opportunism – something the English-speaking media have been quick to call “greedflation”. The term refers to the greed shown by numerous producers, intermediaries and retailers that have used high inflation as an excuse to raise prices and, ultimately, boost their margins. After many years of international price stability – attributable mainly to structural developments such as globalisation and the rise of e-commerce – the opportunity was too good to miss.
The risk of shortages stemming from the COVID-19 pandemic and the war in Ukraine was widely publicised, so the general public was ready to endure a certain increase in the cost of living. Economic agents early on in the supply chain didn’t hesitate to take advantage of that. But this window of opportunity is about to close.
Faced with the risk of an inflationary spiral, central banks have raised their interest rates so sharply that they have put the brakes on economic growth, sometimes quite abruptly. Wage growth has not kept up with the rise in living costs, and consumers are becoming increasingly angry. Pressure is mounting on the authorities, especially in Europe. And the risk of government intervention is looming.
Consumers can no longer be fooled – they’ve realised that prices of raw materials are falling but those of finished goods are still heading upwards. The difference is particularly stark when it comes to food, a major household expenditure. But it’s also true for fuel, which has weighed heavily on consumers’ wallets as well. Barring a further deterioration in the geopolitical climate, which could prompt a renewed surge in commodity prices, it seems very likely that this greedflation will soon come to an end.
It’s consumers’ shift to cheaper products – rather than government measures to control prices or calls for brand boycotts – that’s making the difference, and the risk of a lasting loss of market share is real. Inflation is therefore on the cusp of easing, although the prices of most goods and services probably won’t return to 2019 levels.
Japan – unfazed by current geopolitical storms
The Nikkei has gained 18% since the start of the year. It has surpassed the post-pandemic peak recorded in September 2021 and closed at its highest level in the 30 years since Japan’s economic bubble burst in 1990.
This rally has in part been driven by investors seeking refuge in today’s uncertain global climate. Given the debt ceiling risks in the US and concerns about China’s recovery, Japan stands out as one of the few developed markets in Asia that is unaffected by geopolitical pressures and that has a stable monetary policy.
The Japanese stock market brought in more than USD 20 billion from foreign investors in the second quarter, something not seen since Abenomics was introduced back in 2013. Its semiconductor heavyweights have been buoyed by the hype around the potential of artificial intelligence, and its consumer sector is a way to gain exposure to China’s reopening with less geopolitical risk. This is also why Europe’s luxury stocks have performed so well recently.
When it comes to monetary policy, the Bank of Japan (BoJ) still shows no sign of changing course even though inflation is now above the 2% target. However, a chan-
ge in its yield curve control policy seems likely to happen before the end of the year. Reversing that policy could affect the BoJ’s holdings in Japanese equities, which are estimated to account for around 8% of the total market capitalisation.
Meanwhile, tourism continues to pick up in Japan. Visitor numbers reached a post-pandemic high in April but were still down 33% compared with April 2019. So it’s worth keeping an eye on whether, in the coming months, investors’ return to Japan will be as persistent as that of foreign tourists.
Author
-
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.
