There was a renewed sense of optimism on financial markets again last month. This is based on hopes that inflation in western industrial nations will soon return to normal and that a shift towards monetary easing will take place shortly. The European Central Bank (ECB) took the first step in this direction by cutting its policy rate in June. Shortly afterwards, the Swiss National Bank (SNB) eased its monetary policy for the second time. However, developments in the USA are of even greater relevance to the financial markets. Further progress was made on reining in inflation in June. The overall inflation rate fell to 3 percent, while core inflation dropped to 3.3 percent. It means there’s growing confidence on the financial markets that the US Federal Reserve will ease its monetary policy soon, too.

In this context, not only did capital market interest rates fall, generating gains on the bond markets, but equity markets also rose sharply once more. Share prices climbed by over 4 percent in the USA last month. The S&P 500 index hit a new all-time high in July, soon after the announcement of inflation rates for June. European stock markets benefited from this optimism, making strong gains, too. 

Inflation hasn’t fallen by chance

However, inflation hasn’t fallen by chance, but is the result of a wider economic slowdown. This means Europe continues to wait for an upturn, while bottoming-out seems the best scenario in China at the moment. The domestic market in China, the world’s second largest economy, continues to struggle. Both import and investment figures remain weak. The fall in prices on the real estate market also appears to be gaining pace. Cautious statements in the run-up to the third plenary session of the Communist Party’s 20th Central Committee give little hope of substantial support measures from the Chinese government. And there are growing signs of a slowdown in the US economy, which has been robust up to now. The mood in the services sector, in particular, deteriorated last month, while consumer confidence and sentiment in the construction industry remain subdued.

Dissonance means caution is advised.

Although the decline in inflation rates is encouraging, the related dip in economic performance raises a note of caution. Typically, companies only thrive during economically challenging times in exceptional cases. This is shown by earnings performance in the USA. During the period leading up to recession, profits have generally stagnated before falling sharply during the recession itself. The fact that earnings in the USA are currently flat despite the AI boom tallies with the overall picture of an economic slowdown. The upcoming reporting period should offer even more precise information on the economic situation for companies. Overall, the dissonance observed between financial market performance and economic development is not sustainable, and means we continue to adopt a cautious approach. That’s why we’re still favouring value stocks, the defensive Swiss stock market and emerging market equities over US and European shares.

Performance of asset classes

Our positioning – Swiss focus