Politics enter the bond market
With the exception of the Bank of Japan, central banks are gradually closing the chapter on the inflationary shock of 2022 and initiating a new rate-cutting cycle. Typically, such an environment is favourable to bond investments. However, long-term rates have begun rising again in recent weeks, particularly in the United States. Beyond the resilience of the U.S. economy, this upward pressure seems largely tied to the approaching presidential election and the return of Donald Trump in the polls. Should the Republican candidate win, bond investors are concerned about a likely increase in the US budget deficit due to potential new tax cuts, as well as a temporary inflation spike resulting from new tariffs on imported goods. This resurgence in US bond market volatility is expected to subside once the election results are known. Meanwhile, it's worth noting that at current levels, US long-term yields more than compensate for anticipated inflation over the coming years.
United States: A negligible risk of recession!
As we anticipated last June, leading economic indicators in the United States have significantly deteriorated over the summer. While the SMI index remained in contraction territory, the labor market showed signs of weakness, and corporate growth forecasts were sharply revised downward. Despite these three macroeconomic disappointments, the stock market avoided a correction, contrary to our initial concerns. Investors observed an uptick in volatility at most, with equities even closing the quarter at a new all-time high.
How can we explain this disconnect between economic fundamentals and the expanding valuation multiples of US equities? Could investors be displaying unusual complacency? This is not our interpretation. We believe that markets are rightly discounting the risk of a US recession, despite some pessimists recently rekindling that specter. The resilience of the service sector, low unemployment rates, and robust consumer confidence among American households make a recession scenario highly improbable.
Indeed, it is difficult to foresee a contraction in US GDP now that the Fed has begun to ease monetary policy in tandem with most other central banks. This synchronized easing of financial conditions is expected to have a markedly positive impact on the global economy in the coming months. It is precisely this anticipated economic uplift that equities are pricing in today, a trend that may continue into the fourth quarter, a period traditionally favorable to risk assets.
This seasonal strength could be further bolstered by an earnings season that has exceeded investor expectations. Nearly three-quarters of companies that reported their figures outperformed analysts’ estimates, even as expectations were set relatively high. This week will be pivotal for the markets, with five of the “magnificent seven” companies releasing their financial results. A favorable outcome would likely pave the way for new record highs, especially for the Nasdaq index, which is already hovering near its all-time highs.
This week’s figure
- 4,5$
Following Israel's moderate response against Iran, oil drops by $4.5 on Monday morning. This limited strike paves the way for de-escalation after several weeks of heightened tension between the two countries.
Author
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Daniel Steck has nearly 25 years of experience in finance. After a first experience in financial analysis at Lombard Odier, particularly in the health sector, he continued his career at Reyl & Cie, as an analyst and portfolio manager. He joined Piguet Galland in 2018 as a senior manager and is responsible for the management of various thematic certificates and equity funds in Switzerland and North America.
