06/05/2024

Market review

Correction on the markets

After the first quarter of the year was generally positive for investors, we saw the first correction on the markets in April. 

Initially, the geopolitical tensions between Israel and Iran left investors unsettled. This was followed by increasing doubts about interest rate cuts in the USA, as inflationary pressure is not abating at all. On the contrary, inflation was higher than expected for the 4th month in a row. Higher commodity prices, a far too expansive fiscal policy on the part of the US government and consumers who continue to be keen to spend are not causing inflation in the USA to weaken. 

In principle, the US economy is still very robust and appears to have become almost impervious to higher interest rates. On the one hand, the rapid expansion of the US budget deficit of between 6% and 9% of GDP is responsible for this. On the other hand, the sharp rise in share prices in the US has ensured that consumers, who hold shares directly or indirectly via their pension plans, have steadily increased their wealth and are spending it accordingly. As a result, the US Federal Reserve is unable to cut interest rates and market participants are expecting interest rates to remain at their current level - in stark contrast to the beginning of the year, when up to seven rate cuts were expected.

In Europe, the clocks are ticking somewhat differently with regard to inflation and interest rate expectations. The mood among European companies (including Germans) is normalising noticeably and the economic recovery in the eurozone is progressing. The service sector in particular is growing, while the industrial sector is still in a recessionary phase but is slowly recovering. 

Inflation has not risen despite higher commodity prices, so the expectation of an initial interest rate cut in the eurozone is easy to understand. Market participants are currently assuming that interest rates will be cut by 0.25% at the ECB’s June meeting.

The rise in copper prices observed in recent weeks (which also has an inflationary effect) leaves many unanswered questions. What is clear is that China is buying an unusually large amount of copper. In terms of quantity, it is disproportionately more than the Chinese industry normally buys, stores and processes. 

China is also often seen as a major buyer of other commodities and gold. This raises the question of whether we will soon see a devaluation of the Chinese currency. This idea cannot be completely dismissed, as Chinese exports have suffered greatly and the economy has shown deflationary tendencies at times. 

The fact that the stock markets ultimately did not close the month of April quite so negatively was due to the rather pleasing results of companies in the first quarter of 2024. Among other things, the eagerly awaited results of four of the «Magnificent Seven» companies in the US ensured a positive mood. However, the results of companies in the IT and healthcare sectors must also be good, otherwise the high valuations of these companies would be a major burden on the stock markets.

Stock markets

In general, shares lost between 3% and 5% in April. Geopolitics and stubborn inflation thus took their toll. The fundamentally good business figures for the first quarter of this year only partially offset the negative development. 

The Chinese markets moved completely against the trend. While shares on the Chinese mainland rose by a good 3%, the market in Hong Kong even gained over 7%. Government intervention played a major role here. In addition, the extremely negative sentiment finally seems to be brightening somewhat.

Interest rates

April was also not a good month for bond investors. Due to stubborn inflation and the resulting adjustment in expectations of interest rate cuts, interest rates rose sharply in some cases. 

Interest rates on 10-year USD government bonds jumped by almost 50 basis points, while around 30 basis points more were paid for the same period in the Eurozone. 

In Switzerland, the 3-month SARON rate came under further pressure and now stands at 1.35%, while government bonds were almost unchanged.

Currencies and commodities

Due to the interest rate outlook, the USD strengthened again against the major currencies. 

At the same time, the CHF continued to weaken slightly. 

Copper continued to rise unabated in April, gaining 13%. The reason for this is the unabated demand from China. 

Gold was also slightly higher month-on-month. 

Crude oil was unchanged, but traded much higher during the uncertainty surrounding Israel / Iran. 

Bitcoin suffered a severe setback and lost over 15%.

 

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