Market overview: Divided financial markets

The equity markets continue to reflect hope of a rapid recovery from the coronavirus crisis. However, the rising equity indexes are based largely on the dynamism of just a few sectors. At the same time, falling capital market interest rates are leading to positive returns on the bond markets. Gold has also made further gains recently, exceeding the USD 1,800 mark.

  • The declining yields to maturity on government bonds reflect the pessimism of market participants. The risk assessment for corporate bonds remains unchanged.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. Due to the turbulent market conditions caused by the coronavirus outbreak, government bond prices also fell sharply for a while. After the sell-off on the equity markets, however, demand for secure government bonds rose again, and their value increased. Government bonds gained in value recently, due to falling capital market interest rates.
    Source: SIX, Bloomberg Barclays

    Bond and equity markets often follow opposite trends. Recently, however, the bond market has made gains, while equity markets have also performed strongly. The divergence points to a different market assessment. While equity prices returned to almost pre-crisis levels, the falling yields to maturity on government bonds indicates a more pessimistic view of the situation. This trend is particularly evident on the US bond market.

    Trend in 10-year yields to maturity

    In percent

    The graphic shows the performance of yields on 10-year government bonds in Switzerland, the USA and Germany. 10-year yields to maturity are an important benchmark for interest rate developments. A strong downward trend can be observed over the long term. While this was temporarily interrupted in March, it has slipped back again recently.
    Source: SIX, Bloomberg Barclays

    The interest rates adjusted for inflation forecasts – known as real interest rates – fell to new record lows in many countries. In the USA, the decline in recent weeks amounted to around 0.3 percentage points. As a result, yields to maturity on ten-year government bonds also fell there. The large-scale bond-buying programmes of the US Federal Reserve (Fed) have also contributed to falling interest rates. The Fed recently failed to rule out the possibility of a yield curve control mechanism, but highlighted the drawbacks of this policy, which means it is not expected to be introduced in the short term.

    Credit spreads on corporate bonds

    In percent

    This graphic shows the difference between the yields to maturity on government and corporate bonds in US dollars, euros and Swiss francs. These credit spreads rose sharply in March. This means that higher-risk debtors have to pay more interest than secure government issuers when borrowing. However, the spreads have now settled down again.
    Source: Bloomberg Barclays

    Investors’ perception of risk is generally reflected in the interest rate differential between secure government bonds and higher-risk corporate bonds. The spreads – in other words, the premium on higher-risk bonds – have stabilized quickly after the sharp rise in March. Risk assessments on both corporate bonds and emerging market bonds have barely changed over recent weeks. Only credit spreads on high-interest corporate bonds rose slightly again.

  • The equity markets continued their recovery last month, but proved volatile. The momentum is being driven by only a few sectors.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of the equity markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. After the dramatic slump in March, equity prices have seen a remarkable rally and have largely recouped their losses. This momentum is being driven particularly strongly by large technology equities and by Chinese equities. The VIX volatility index remains at a high level.
    Source: SIX, MSCI

    The upward trend on the global equity markets also continued over recent weeks. Swiss equities climbed by 4.7 percent last month, while emerging markets, including China, recorded an 8 percent increase. Large technology companies which are also known as FANG+, benefited from a particularly strong boost. A look at the VIX volatility index confirms that market uncertainty remains high.

    Momentum of individual markets

    In percent

    The chart depicts the momentum of twelve of the world's major stock markets. The momentum compares the most recent price level with the average of the last 200 days. It thus shows how far the leading index is currently trading above or below the trend of the last 200 days. The chart shows that most countries are now showing positive momentum again, led by China. Momentum is currently weakest in the UK and Australia.
    Source: MSCI

    Stock markets around the world recovered rapidly from the slump in March. In almost all countries, the leading indices are already well above the trend of the last 200 days. The momentum shown here is therefore in positive territory. The United Kingdom and Australia are exceptions to this. In both countries, commodity companies and financial stocks have a high weighting in the leading index. Their low prices put pressure on the momentum. The Chinese equity market, on the other hand, has outperformed all other emerging markets in terms of returns since the beginning of the year and especially in the last month.

    Price/earnings ratio

    The graphic shows the price/earnings ratio (P/E ratio) for the stock markets in Switzerland, worldwide and in emerging markets since 2000. The P/E ratio fell sharply on all three equity markets after the recent market correction. However, it then benefited from rising prices during the recovery rally. Most companies have not yet published their profit figures for the second quarter. Analysts’ forecasts are currently very pessimistic.
    Source: SIX, MSCI

    The extent of the coronavirus slump is becoming increasingly clear as the first company figures for the second quarter are published. Analysts anticipate a decline in profit of 44 percent year-on-year for the USA. This will also be reflected in the equity market valuation measured by P/E ratio and will make equity prices appear even more expensive.

  • Swiss real estate funds are under pressure despite falling capital market interest rates. Uncertainty over the future demand trend is holding investors back from buying.

    Indexed performance of Swiss real estate funds

    100 = 01.01.2020

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. While this has recovered since the market slump in March, it has now trended sideways for several weeks and still stands at around 3 percent below the level at the start of the year.
    Source: SIX

    The prices of listed Swiss real estate investments continue to waver. While they recovered quickly from the sell-off in March, they have now been trending sideways for several weeks and still stand at around 3 percent below their level at the start of the year. The further recent falls in capital market interest rates also seem to have failed to arouse investor interest. Uncertainty over the future demand trend is clearly playing a role. It is not just the uncertain economic outlook that is influencing this uncertainty, but also the trend towards remote working. This makes investment in commercial property in particular less attractive.

    Premium on Swiss real estate funds and 10-year yields to maturity

    In percent

    This graphic shows the yield to maturity of 10-year Swiss government bonds and the premium on real estate properties contained in Swiss real estate funds since 2000. This premium skyrocketed last year and reached new all-time highs in February of this year, before plummeting in March. This trend shows an inverse correlation with 10-year yields. While these have fallen again recently, it has had little effect on premiums so far.
    Source: SIX

    Contrary to expectations, the further recent falls in capital market interest rates have sparked little momentum on the real estate market. The premium on properties contained in Swiss real estate funds is currently fluctuating around a value of 20 percent. The premium trend usually runs contrary to interest rate developments. This is currently not the case, however, despite central banks worldwide giving assurances that they will maintain their low-interest policy in the long term.

    Vacancy rate and real estate prices

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While rental prices and the real estate prices of apartments have been on a downward trend over the past five years, the vacancy rates are continually rising. The economic problems caused by the coronavirus crisis will see a further increase in the vacancy rate of commercial properties.
    Source: SNB, BfS

    It is already clear that the coronavirus crisis will not leave the real estate market unscathed. The trend towards working from home was given a major boost by lockdown measures. This raises the question of whether the change in working practices will have a negative impact on demand for commercial and office properties over the medium term. While price expectations for residential properties are cautiously optimistic, the outlook for commercial properties is more pessimistic.

  • Currencies

    The uncontrolled spread of coronavirus is having an adverse impact on the prices of South American currencies. By contrast, commodity currencies are benefiting from higher oil prices.

    Currency pair Price PPP Neutral range Valuation
    Currency pair
    EUR/CHF
    Price
    1.08
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.21
    Neutral range Range of historically normal fluctuations.
    1.13 – 1.30
    Valuation
    Euro   undervalued
    Currency pair
    USD/CHF
    Price
    0.95
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.95
    Neutral range Range of historically normal fluctuations.
    0.83 – 1.07
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.19
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.44
    Neutral range Range of historically normal fluctuations.
    1.24 – 1.65
    Valuation
    Pound sterling   undervalued
    Currency pair
    JPY/CHF
    Price
    88.08
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    106.68
    Neutral range Range of historically normal fluctuations.
    92.42 – 126.14
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.41
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.21
    Neutral range Range of historically normal fluctuations.
    11.02 – 13.40
    Valuation
    Krona undervalued
    Currency pair
    NOK/CHF
    Price
    10.16
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    13.09
    Neutral range Range of historically normal fluctuations.
    11.72 – 14.46
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.14
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.27
    Neutral range Range of historically normal fluctuations.
    1.11 – 1.44
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    107.30
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    89.24
    Neutral range Range of historically normal fluctuations.
    73.40 – 105.08
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.99
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.41
    Neutral range Range of historically normal fluctuations.
    6.15 – 6.67
    Valuation
    Renminbi undervalued

    Source:   Web Financial Group

    The recovery of the oil price over recent weeks has boosted commodity currencies, especially the Norwegian krone, the Australian dollar and the New Zealand dollar. South American currencies have come under greater pressure due to the spread of coronavirus there. There has been less demand from investors for safe havens, such as the Japanese yen and US dollar, reflecting the more optimistic market mood.

    Gold

    Uncertainty over future economic development and the risk of rising inflation rates over the medium term are causing gold prices to rise.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2020

    This graphic shows the indexed performance of gold in Swiss francs over the year. Owing to greater uncertainty on the market over the spread of coronavirus, there was strong demand for gold as a safe haven. Its value has risen by around 16 percent since the start of the year, which means it remains the highest-yielding asset class. Short-term fluctuations have not yet changed that.
    Source: Web Financial Group

    Gold remains the highest-yielding asset class since the start of the year, with a price gain of over 16 percent. The precious metal recently exceeded the mark of USD 1,800 per fine ounce. Only in 2011 was the price briefly higher. Its popularity reflects general economic scepticism amongst investors – in contrast to the optimism on the equity markets – and a hedge against higher inflation rates, which are feared due to the huge interventions by central banks.

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