04/10/2024
Market review
Key interest rates are falling
So now the US Federal Reserve has finally lowered interest rates too. In an unusually large move, it reduced its key interest rate by 0.5%. Many economists had expected a cut of 0.25% and were taken by surprise. At its press conference, the Fed emphasised that it had shifted its focus from fighting inflation to strengthening the economy and the labour market. Fed Chairman Powell himself stressed that the major recalibration of monetary policy was intended to support the labour market and was not necessarily the new pace for future interest rate cuts. The signals being sent by the Fed are mixed and not entirely comprehensible. On the one hand, we see a labour market that has been cooling for some time but is still in relatively robust shape. On the other hand, the US economy remains very strong, having grown by 3% in the second quarter of this year and appearing to be on track for 3% growth in the third quarter. Consumers also appear to be holding up well, with consumer spending growing by 3% in the third quarter, while inflation continues to fall.
Furthermore, contrary to many assumptions, the savings rate in the US has risen from 3.3% to 5.2%. So, there are no signs of an impending crisis, let alone a recession. It is suspected behind closed doors that the big interest rate move was also politically motivated, as the debts and the associated interest payments are slowly getting out of hand. In Switzerland, the central bank also decided to lower the key interest rate by 0.25% to 1%. This step had been expected, as inflation is very low and the Swiss franc is 1.5% higher than in the summer. The SNB expects economic growth in Switzerland to be rather modest in the coming quarters. In the medium term, however, growth should gradually improve, supported by somewhat stronger foreign demand. The ECB also cut its interest rates by 0.25%, as expected. Inflation in Europe is just under 2%, and in large economies such as France and Germany it is even well below that. Further interest rate cuts could therefore follow, given that the economy is in a rather sorry state. There is no good news coming out of Germany in particular, with official expectations of zero growth for 2024 having been announced recently.
In France, too, the Olympic glow seems to have quickly faded, with the economy weak and debt constantly rising. The bill is coming thick and fast, with the yield on 10-year bonds now higher than those of Spain and Portugal. The gap to Greek government bonds is also only marginal, which is rather surprising and should be seen as a warning signal. In China, the People’s Bank of China and other local regulators have announced long-overdue measures to stimulate the economy. In addition to lowering the repo rate, interest rates for existing mortgages were cut to halt the downturn in the property market. Furthermore, the minimum down payment for buyers of second homes was reduced from 25% to 15%. As part of the support measures, a new swap facility was also announced that allows brokers, funds and insurance companies to obtain credit to purchase shares if qualified collateral is provided. A lending programme was also adopted to encourage share buybacks. The Chinese stock markets reacted accordingly, rising by over 25%.
Stock markets
Thanks to global interest rate cuts and government support programmes in China, equities ended the month slightly higher. In addition to the strong Chinese equities, which rose by over 20% thanks to government intervention, the weak prices of Swiss equities are striking.
The heavyweights Roche and Nestlé weighed on the index. Roche was briefly punished due to mixed results from a phase 1 drug. At Nestlé, the major structural problems are becoming increasingly visible. Here, people are eagerly awaiting the plans of the new CEO.
Interest rates
The interest rate cuts in the US and Europe have led to a slight normalisation of the yield curve. The much-heeded difference between two-year and ten-year bonds has recently ceased to be negative.
Market participants are currently still pricing in a number of further interest rate cuts. In the US in particular, a veritable flood of interest rate cuts is expected over the next 12 months, although we do not see it that way. There is great potential for disappointment here.
In Switzerland, long-term bonds are currently offering hardly any worthwhile returns.
Currencies and commodities
While the USD weakened somewhat due to the unexpectedly large interest rate cut by the Federal Reserve, the EUR and the CHF remained in narrow ranges.
Gold is rushing from high to high and is unimpressed by all the interest rate cuts and government support.
Industrial metal prices, led by iron ore and copper, rose sharply on news from China. Crude oil continued to lose ground as there is still an oversupply, coupled with supposedly weak demand. Bitcoin recovered somewhat, rising by 8%.
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