Market overview: Rising interest rates grind to a halt

The markets remain in a buoyant mood. The brighter economic outlook is driving equity markets to new record highs. Swiss real estate funds are set to surge. Despite the positive environment, the Swiss franc’s downward trend is coming to a halt.

  • The sell-off on the bond markets has come to an end. Interest rates have stabilized at pre-coronavirus levels.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2021

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. The brighter economic outlook since the start of the year has led to a sell-off on the bond markets, particularly in the USA, and long-term interest rates have risen sharply. This trend did not come to an end until early April. Prices have since trended sideways.
    Source: SIX, Bloomberg Barclays

    The sell-off on the bond markets since the start of the year has come to an end. Prices have predominantly trended sideways since mid-March. Swiss and German government bonds fell in value last month, whereas US 10-year bonds rose slightly. Jerome Powell, chair of the US Federal Reserve, has reaffirmed several times that he has no plans to increase interest rates in the foreseeable future. The inflation trend currently being observed is primarily due to the strong recovery in the oil price over the course of last year and is not a cause for concern.

    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. There has been a temporary reversal in the trend since the start of the year, and interest rates have risen. This did not come to an end until early April.
    Source: SIX, Bloomberg Barclays

    After rising sharply since the start of the year, yields to maturity have stabilized at a high level. In the USA, they have returned to the pre-crisis level for 10-year government bonds, standing at around 1.60%. The interest differential between Swiss and German government bonds has narrowed again recently. Both currently stand at -0.27%, which is the pre-pandemic level. In contrast, real interest rates are still below their long-term average. In contrast, real interest rates are still below their long-term average. This means there is upswing potential, but an increase in inflation forecasts cannot be ruled out in the medium term. Both of these factors indicate that there could be further rises in nominal interest rates.

    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 meant that higher-risk debtors had to pay more interest than secure government issuers when borrowing. With the normalization of high-quality Swiss corporate bonds, the credit spreads have returned to pre-coronavirus levels across all ratings.
    Source: Bloomberg Barclays

    The risk appetite among investors has been at pre-crisis levels since the turn of the year. This is clearly reflected in the normalization of the credit spreads on corporate bonds – there is now little differentiation. For higher-quality bonds denominated in EUR or USD, the difference is now less than one percent, while the risk is deemed even lower for Swiss corporate bonds. This trend is also being observed for higher-risk, high-yield bonds. In the USA, they are now lower than a year ago. This normalization may continue for the time being, not least thanks to the generous purchasing programmes by the central banks. 

  • The Swiss equity market recouped lost ground last month. After a slow start to the New Year, it climbed by almost 3% last month. The Chinese equity market, which has been adversely impacted by the new cartel laws, is lagging behind.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2021

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. The phenomenal recovery rally over recent months on the equity markets was increasingly becoming divorced from economic reality. The US and Swiss stock exchanges have returned to their pre-crisis levels. Emerging market stock exchanges are currently struggling.
    Source: SIX, MSCI

    The upward trend on the international equity markets continued in April. Events with downswing potential – such as the blocking of the Suez Canal, the implosion of the Archegos hedge fund or the revived debate about tax rises in the USA – have been met with a shrug of the shoulders. Prices are currently heading in only one direction – and that’s up. The S&P 500 recently broke through the 4,000-point mark, and the German DAX equity index also achieved a new record high of over 15,000 points. Australian equities performed equally well and were up by 8% last month. 

    Momentum of individual markets

    In percent

    The graphic shows the momentum of 16 key equity markets worldwide. Momentum compares the latest data with the average figures from the past six months. The sense of relief on global stock markets over recent months is also reflected in the positive momentum of the individual markets, albeit slightly less evidently recently. The Netherlands, Taiwan and Germany are currently leading the way. Switzerland also gained momentum and moved into positive territory. The Chinese equity market has now been lagging behind since April.
    Source: MSCI

    Not all equity markets are performing quite so dynamically. Stock exchanges in emerging markets, in particular in India and China, have suffered a sharp downswing. China, which had consistently led the way until mid-February, is now bringing up the rear. Despite a strong economic outlook, investors are showing restraint in light of the government’s recent efforts to adopt a more stringent policy on monopolies. Compared to the previous month, momentum on the Swiss equity market has picked up significantly. After a slow start to the New Year, it has now reached its pre-crisis level.

    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 declined sharply in all three equity markets after the sell-off in March 2020. However, it then benefited from rising prices once again during the recovery rally. The rise in equity prices worldwide also led to a further increase in valuations in April. The valuations of emerging market equities, which slumped recently, proved an exception.
    Source: SIX, MSCI

    Equity valuations worldwide are now significantly higher than their pre-crisis levels. The recent slump in emerging market equity prices did nothing to change this. US but also Japanese equities are very expensive measured by their price/earnings (P/E) ratio. Swiss equities, which recovered more slowly, are an exception, and their valuation is low, despite the recent increase of almost 5% last month. 

  • The protracted sideways trend for Swiss real estate funds has come to an end. Prices surged in April, rising by 6%.

    Indexed performance of Swiss real estate funds

    100 = 01.01.2021

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past twelve months. After recovering from the slump in March, they then trended sideways for weeks. They enjoyed a real boom at the end of the year, yielding a return of around 10 percent for the year. They have predominantly trended sideways since the start of the year, before soaring in the first week of April.
    Source: SIX

    After performing impressively in terms of price in the second half of 2020, indexed Swiss real estate funds appeared to be making little headway in the New Year. This changed dramatically in the first week of April. New record highs and an upswing of over 6% were achieved in a short space of time. But there has also been strong demand for real estate investments worldwide recently. European real estate investments climbed by 4%, while in the US they rose by 2%. 

    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, before plummeting in March 2020. After the Swiss real estate market recovered to the year-opening level, premiums have increased again since the start of the year. Premiums of over 43 percent on average are currently being demanded.
    Source: SIX

    The average premiums achieved on the properties contained in the real estate funds have reached new highs. Rarely before have they diverged as much from their fair value, which is derived from long-term interest. The upturn in prices and the fall in interest rates over recent weeks and months have led to the rise in premiums. On average, premiums of more than 43% are currently being demanded. 

    Vacancy rate and real estate prices

    100 = January 2000 (left) and in percent (right)

    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, vacancy rates are continually rising. The economic difficulties caused by the coronavirus crisis have seen a further increase in vacancies. Rental apartments have been particularly severely hit. There has been a further rise in the price of single-family homes.
    Source: SNB, SFSO

    Accommodation has become a higher priority for many people due to the coronavirus crisis. With working from home becoming mandatory and a dramatic reduction in activities available, many people suddenly found themselves spending more time at home than ever before. This not only triggered demand for renovation and home improvements, but also changed living requirements. There is particularly strong demand for space and proximity to nature. Lots of people are moving out of the city into the suburbs. This is also reflected in the weaker price trend of urban real estate compared to more rural property – at 0.6%, the inflation rate is at its lowest level for four years. Demand for holiday homes also appears to remain strong.

  • Currencies

    The Swiss franc has overcome its weakening, and its downward trend came to a halt last month. This was surprising in light of the positive risk environment. In contrast, the US dollar is moving in the opposite direction: while it has performed strongly since the start of the year, momentum ground to a halt in early April. 

    Currency pairPricePPPNeutral rangeValuation
    Currency pair
    EUR/CHF
    Price
    1.10
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.15
    Neutral range Range of historically normal fluctuations.
    1.07 – 1.23
    Valuation
    Euro neutral
    Currency pair
    USD/CHF
    Price
    0.92
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.88
    Neutral range Range of historically normal fluctuations.
    0.77 – 0.99
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.27
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.41
    Neutral range Range of historically normal fluctuations.
    1.22 – 1.61
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.85
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.04
    Neutral range Range of historically normal fluctuations.
    0.88 – 1.20
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.92
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.07
    Neutral range Range of historically normal fluctuations.
    10.86 – 13.27
    Valuation
    Krona neutral
    Currency pair
    NOK/CHF
    Price
    11.01
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.58
    Neutral range Range of historically normal fluctuations.
    11.23 – 13.93
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.20
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.30
    Neutral range Range of historically normal fluctuations.
    1.13 – 1.47
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    108.74
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    84.49
    Neutral range Range of historically normal fluctuations.
    69.38 – 99.60
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.52
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.31
    Neutral range Range of historically normal fluctuations.
    6.07 – 6.56
    Valuation
    Renminbi neutral

    Source: Web Financial Group

    The good news from the economy and the impressive progress with the global vaccination campaign also had an impact on the currency markets. The Swiss franc has weakened significantly since the start of the year. However, the downward trend came to an end last month. This means it remains at almost a fair valuation on a trade-weighted basis. In contrast, the Japanese yen – another safe-haven currency – continued its downward trajectory unabated. The looming fourth wave of coronavirus in Japan may also be a factor in this trend. The US dollar’s momentum has also turned since early April, with the upward trend coming to a halt. Despite this, it remains the most overvalued currency in the world according to our calculations. Some emerging market currencies are currently struggling. Rising COVID-19 case numbers have caused the Indian rupee to fall to its lowest level since July, while the value of the Turkish lira tumbled by over 5% last month. 

    Gold

    Gold has plummeted in value since the start of the year. Due to the strong economic performance and rising interest, its price has plunged by 200 US dollars. The precious metal only recently recovered to a value of 1,750 US dollars per troy ounce. 

    Indexed performance of gold in Swiss francs

    100 = 01.01.2021

    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. However, after hitting a record high in August, the price per troy ounce declined. In April, it stabilized at 1,750 US dollars per troy ounce.
    Source: Web Financial Group

    After surpassing the mark of 2,000 US dollars last August, the price of gold has been falling. Investors have shown greater risk appetite since the turn of the year and are shunning the precious metal. The price per troy ounce slipped below the mark of 1,700 US dollars twice in March, but has recently recovered slightly. There was renewed demand in India and China recently – both major players on the international gold market. 

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