An easing of monetary policy soon seems increasingly unlikely due to persistent inflationary pressure, which has caused capital market interest rates to rise sharply again.
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Market overview: Equity markets resist rising interest rates
Given sustained strong economic growth in the USA and wage inflation pressure observed in many places, an easing of monetary policy has become a more distant prospect. However, that hasn’t dampened optimism on the equity markets, thanks to tech firms.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2024
Last month, it became more apparent that imminent policy rate cuts aren’t the most likely scenario. The still robust US economy and strong wage growth in many economic areas are keeping the pressure on monetary policy. The US Federal Reserve, European Central Bank and Bank of England also left their policy rates unchanged. The announcements made by the heads of these central banks indicate policy rate cuts aren’t expected before the summer months. The bond markets slumped on this news. However, Swiss investors barely felt this downturn owing to the weaker Swiss franc.
Trend in 10-year yields to maturity
Monetary easing has become a more distant prospect. This caused yields to maturity on 10-year government bonds to rise sharply again after a brief dip in early February. In the USA, yields to maturity now stand at 4.2 percent again – up by around 30 basis points on year-opening. The UK recorded the strongest upturn, with a rise of almost 40 basis points. The yields to maturity on Swiss federal bonds also followed this trend of rising interest rates and have now climbed to over 0.8 percent again.
Credit spreads on corporate bonds
In percentage points
Risk premiums on corporate bonds fell again last month, despite the long-term interest level trending upwards. This can be explained by the positive mood on the financial markets, especially the equity markets. The level remains remarkably low by historical standards, barely reflecting concerns about a recession.
The equity market resisted rising interest rates last month, making strong gains. Once again, tech stocks were the main driver, on the publication of strong annual results by the large technology companies in the USA.
Indexed stock market performance in Swiss francs
100 = 01.01.2024
The stock market was unperturbed by dwindling hopes of an imminent easing of monetary policy. Instead, share prices rose considerably last month, with tech firms, in particular, making a huge contribution. These companies recently published impressive annual results in the USA, pushing equity prices up significantly. By contrast, the performance of the market as a whole was relatively modest. The Swiss equity market was particularly weak. Roche, the index heavyweight, was a major factor behind the subdued performance, with its share price falling more than 9 percent last month.
Momentum of individual markets
Optimism on the equity markets meant most of them experienced positive momentum. There was further upward impetus on the tech-heavy stock markets, such as the USA, Taiwan and the Netherlands. In contrast, the negative momentum intensified on the Chinese equity market, mainly due to the still-troubled real estate sector and challenging economic outlook.
The price/earnings ratio of the equity markets improved significantly in many places again last month due to continued equity price rises. In contrast, the P/E ratio fell slightly in Switzerland. The recently published fall in profit and revenue at the pharmaceutical company Roche is likely to have been a major factor.
There has been another upturn in Swiss real estate investments. Although long-term interest rates have gone up since the start of the year, Swiss real estate funds have made substantial gains again.
Indexed performance of Swiss real estate funds
100 = 01.01.2024
Exchange-listed Swiss real estate funds have continued their sustained upward trend since November 2023, and their value increased significantly at the start of the year. They climbed by 3 percent in the first few weeks of 2024. The positive development was achieved despite the significant rise in long-term capital market interest rates. Yields to maturity on 10-year Swiss government bonds have increased since early January from below 0.7 percent to almost 0.9 percent. Higher rental incomes achieved due to the rise in the reference interest rate are likely to be a major reason for the increase in value.
Premium on Swiss real estate funds and 10-year yields to maturity
The premium paid on exchange-listed real estate funds compared with the properties’ net asset value has risen considerably over recent months. This is mainly due to the increase in the value of the real estate funds. In contrast, the NAV of many properties changed only slightly, which will come as a relief for many real estate investors. Due to the much higher interest level compared with the past 10 years, there were fears that the NAV of many properties would suffer a downward correction.
3-month SARON and 10-year yields to maturity
Despite the recent rise, yields to maturity on 10-year Swiss government bonds remain well below the Swiss reference interest rate SARON. This means Swiss investors are still facing the exceptional situation of short-term interest rates being higher than long-term rates. The reverse is usually true and longer-term financing solutions are better remunerated than short-term ones due to the higher risks and greater opportunity costs involved. This means that when deciding on a mortgage term, expectations of potential interest rate cuts by the Swiss National Bank (SNB) are a key factor. Market participants currently anticipate that policy rates will be cut to around 1 percent by the end of the year.
In the first few weeks of the new year, the US dollar appreciated considerably, interrupting its downward trend over the previous months. Exceptionally, the Swiss franc was one of the weaker currencies.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price0,94 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0,89 Neutral range Range of historically normal fluctuations.0,82 – 0,96 ValuationEuro neutral Currency pairUSD/CHF Price0,87 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0,79 Neutral range Range of historically normal fluctuations.0,69 – 0,89 ValuationUSD neutral Currency pairGBP/CHF Price1,10 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1,20 Neutral range Range of historically normal fluctuations.1,04 – 1,37 ValuationPound sterling neutral Currency pairJPY/CHF Price0,59 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0,92 Neutral range Range of historically normal fluctuations.0,76 – 1,08 ValuationYen undervalued Currency pairSEK/CHF Price8,35 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.9,78 Neutral range Range of historically normal fluctuations.8,78 – 10,79 ValuationKrone undervalued Currency pairNOK/CHF Price8,26 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.10,61 Neutral range Range of historically normal fluctuations.9,42 – 11,79 ValuationKrone undervalued Currency pairEUR/USD Price1,08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1,13 Neutral range Range of historically normal fluctuations.0,98 – 1,27 ValuationEuro neutral Currency pairUSD/JPY Price148,19 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.86,32 Neutral range Range of historically normal fluctuations.67,62 – 105,01 ValuationYen undervalued Currency pairUSD/CNY Price7,19 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6,02 Neutral range Range of historically normal fluctuations.5,60 – 6,44 ValuationRenminbi undervalued
Source: Web Financial Group
The start of the new year marked a trend reversal for many currencies. For example, the US dollar was the best-performing G10 currency in January, after depreciating significantly at the end of 2023. By early February, the US currency had gained by almost 3 percent on a trade-weighted basis. The strong performance was mainly due to the US economy’s robust economic growth.
The Swiss franc also underwent a trend reversal. After a very strong year-end, the franc suffered an exceptional substantial fall in value in January. The Swiss National Bank’s (SNB) announcement that it would intervene on the foreign exchange market again, if necessary, may have been a factor in the currency’s depreciation. However, the Swiss franc is likely to appreciate again over the long term given comparatively low inflation.
The precious metal is still extremely popular at the start of the new year and remains stable above the mark of 2,000 US dollars per troy ounce.
Indexed performance of gold in Swiss francs
100 = 01.01.2024
The gold price changed only marginally in January and early February, maintaining its high level. Robust demand for the precious metal can be explained by various factors, including a number of geopolitical conflicts, little progress of late on combating inflation and greater uncertainty over investment in the Chinese market. Demand appears so strong that it has completely offset the appreciation effect of the US dollar. Appreciation of the US dollar, as we saw at the start of the year, usually causes the precious metal, which is traded in dollars, to fall in value.