The US’s leading manufacturing indicator – the ISM Manufacturing Index – came in stronger than expected in August. Although it’s still in contraction territory, it seems to be on the rebound, which suggests that the economy is picking up. This is yet another factor that supports our view that the US economy will make a soft landing.
Swiss stocks were buoyed by last week’s stock market rally to varying extents. The market’s most defensive stocks again lagged behind, with Novartis and Nestlé ending the week in negative territory as investors’ risk appetite remained strong. We still recommend gaining exposure to small caps.
India’s GDP growth accelerated to 7.8% from April to June, up from 6.1% in the previous quarter. The country’s stock market has been boosted as investors rotate out of China. However, it’s trading a large premium relative to most other emerging markets, which will be a major upside risk as we head towards the end of the year.
It looks like US yields have peaked
Long-term yields experienced upward pressure in August, with 10-year yields again nearing last October’s peak of 4.33% before dropping off slightly towards the end of the month. We think this tension can be put down to the swathe of new issues on the bond market, which have come at a time when economists and investors are pricing in the ever-increasing likelihood that the US economy will avoid a recession and make a soft landing.
This oversupply comes primarily from the US federal government, which has begun issuing Treasury bonds again after a long period in which it was forced to draw on its reserves while US politicians made up their minds about raising the debt ceiling. Since the ceiling was raised, the US Treasury has been filling the funding gap through major new bond issuances on the primary debt market.
This period of oversupply will be short, and investors should soon be reassured by the fall in inflation. Energy and commodity prices have stabilised, which has helped to push down inflation. The loosening of the labour market has also helped and is likely to provide some reassurance to the US Federal Reserve. Over the last three months, an average of 150,000 jobs have been created each month, which is much lower than the monthly figure of 400,000 recorded in 2021 and 2022. Unemployment has also risen to 3.8% – another sign that things are calmer on the jobs market. This is up on the record low of 3.4% from the start of the year. A more settled jobs market is good news because it will help to keep wage growth in check. And fears of a wage-price spiral appear to be fading as a result.
With inflation more under control and the labour market easing, the Fed no longer has any good reason to keep raising interest rates. In other words, lower inflation and the situation on the labour market indicate that US bond yields have probably already reached their peak. However, their decline is likely to be slower than in previous cycles. The US economy is holding up well, which could mean that the Fed will be in less of a hurry to cut rates. Higher rates for longer – that’s no doubt what’s in store for the US capital market.
Commodities - oil prices are picking up
After consolidating briefly in August, oil is heading upwards once again and the WTI price is now above USD 85 – its highest level since November 2022. And we think a short-term target of USD 90–95 is technically feasible.
Our bullish stance on oil is backed by recent data, which contradict fears of a recession, something that has been weighing on oil prices for the past year. In June, demand for oil reached an all-time high of 103 million barrels per day. Demand is picking up across the board – in road and air transport, as well as in the plastics industry. But the situation is not yet back to normal, and there are still some COVID-19-related disruptions, such as those affecting international air traffic in China. In addition, the US’s strategic reserves, which were used to balance the market following the invasion of Ukraine, will soon have to be replenished.
After a shaky period, Opec has managed to regain its grip on prices by cutting output in a more coordinated way. And even Russia has met its targets, albeit a little behind schedule. Nevertheless, this supply-side support has probably already passed its peak, as seasonal factors and Opec’s smaller market share mean that the bloc is less able to influence prices.
We remain bullish on oil. The market remains buoyant both in fundamental and technical terms. Only sentiment is starting to weigh on prices, but we’re still a long way from the extremes we saw last year. Lastly, the futures curve is once again in backwardation, which means that investors can get a return of almost 8% in addition to any gains from higher prices.
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.
