The announcement by central banks of plans to scale back bond-buying schemes has had little impact on the bond markets so far. However, higher-than-expected inflation in the euro zone has seen interest rates rise moderately in Europe.
Market overview: financial markets remain optimistic
Uncertainty on the financial markets has risen slightly and minor corrections took place on some stock markets. But, overall, the financial markets remain optimistic. Gold and Swiss real estate funds are suffering losses.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2021
The Delta variant’s impact on the global economy has been limited and the economic outlook remains bright. However, demand for secure government bonds is still strong. US securities remained at the prior month’s level and barely reacted to the debate about scaling down the US Federal Reserve’s bond-buying programme. European securities saw moderate losses. Swiss government bonds have been in negative territory by just under 4 percent since the start of the year as have their German counterparts by just over 1.5 percent.
Trend in 10-year yields to maturity
Yields to maturity on government bonds have been falling again worldwide since the spring after almost reaching a record-high at the start of the year. European interest rates in particular climbed again slightly last month. This is likely to be due to much higher-than-expected eurozone inflation of 3 percent in August. The yield to maturity on 10-year German securities now stands at just under -0.3 percent again, while that on their Swiss counterparts is slightly higher. Yields to maturity on 10-year US bonds have trended sideways, at around 1.3 percent.
Credit spreads on corporate bonds
The buoyant mood on the financial markets saw further demand for higher-risk investments last month. This means investors are differentiating less between higher-risk corporate bonds and secure government bonds, which is illustrated by the spread being demanded on the market. The spread on US corporate bonds fell further, reaching 0.9 percent at the end of August. This brings US credit spreads into line with their European counterparts. This spread is much lower for Swiss corporate bonds, at 0.5 percent.
The upward trend of recent weeks on the global stock markets has been interrupted and they have undergone a slight correction. Japanese equities emerged as the big winners.
Indexed stock market performance in Swiss francs
100 = 01.01.2021
The virtually unchecked upward trend we had seen on the global equity markets slowed down at the end of summer. There have also been minor corrections over the past month. These included Brazilian equities, which fell by 8 percent, and South Korean equities, down by 5 percent. The outlier on the upside was the Japanese equity market, climbing by almost 8 percent since Prime Minister Suga announced his resignation. Investors are anticipating that his successor will pursue a more expansive economic policy.
Momentum of individual markets
After the phenomenal recovery rally during the first half-year, there is now a slowdown in recovery growth worldwide. Momentum on the equity markets has weakened accordingly, but predominantly remains in positive territory. Indian equities displayed the greatest momentum last month. India had been hit by a second, severe wave of coronavirus recently. But the worst now seems to be over, boosting equity prices. Chinese equities have struggled recently. Yet, momentum now appears to have shifted after the publication of the 5-year plan on the “rule of law” despite moderate economic news.
In the wake of the post-coronavirus recovery, companies worldwide posted higher profits again. Brazil achieved the highest earnings growth recently, up by over 30 percent quarter-on-quarter. But earnings were once again positive on the Swiss market, too. This also impacted on equity valuations measured by their price/earnings ratio (P/E ratio). The P/E ratio for the Swiss equity market currently stands at 23, which is in line with the global average. The valuations of emerging market equities are now even more attractive with a P/E ratio of 16.
Swiss real estate funds experienced a slight correction at the end of summer. Given the low interest rates, valuations are still very high.
Indexed performance of Swiss real estate funds
100 = 01.01.2021
Demand for Swiss real estate funds remained high over the summer, with prices trending sideways at a record-high level. Momentum slowed in early September and prices fell by almost 2 percent. This was overdue given the record-high valuations. The increase for the year to date is still 6 percent.
Premium on Swiss real estate funds and 10-year yields to maturity
In the wake of the price correction on indexed Swiss real estate investments, premiums also fell slightly again last month. They had reached the 50 mark for the first time in August. Never before had investors been willing to pay such a high premium on the value of the properties contained in the funds. At the same time, the yield to maturity on 10-year Swiss government bonds rose to just under -0.2 percent. However, the overvaluation measured by interest rates was still down slightly, overall, from its recent record-highs.
Vacancy rate and real estate prices
100 = January 2000 (left) and in percent (right)
It isn’t just the prices of Swiss real estate that have constantly risen over the past 20 years. The number of vacant properties has also increased every year since 2009. The share of vacant properties on the Swiss real estate market climbed from 0.9 percent to over 1.7 percent during this period. On 1 June 2021, data from the Swiss Federal Statistical Office indicated a fall in the vacancy rate for the first time since, dropping to 1.5 percent. Besides the high demand for living space, the decline in construction work also helps explain this development.
There was less movement on the currency markets last month. Some commodity currencies strengthened again. Due to the increased inflation difference, the value of the Swiss franc fell sharply, measured by purchasing power parity.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.09 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.10 Neutral range Range of historically normal fluctuations.1.02 – 1.17 ValuationEuro neutral Currency pairUSD/CHF Price0.93 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.84 Neutral range Range of historically normal fluctuations.0.74 – 0.94 ValuationUSD neutral Currency pairGBP/CHF Price1.28 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.39 Neutral range Range of historically normal fluctuations.1.20 – 1.58 ValuationPound sterling neutral Currency pairJPY/CHF Price0.84 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.02 Neutral range Range of historically normal fluctuations.0.86 – 1.18 ValuationYen undervalued Currency pairSEK/CHF Price10.76 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.11.40 Neutral range Range of historically normal fluctuations.10.29 – 12.50 ValuationKrona neutral Currency pairNOK/CHF Price10.73 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.15 Neutral range Range of historically normal fluctuations.10.85 – 13.46 ValuationKrone undervalued Currency pairEUR/USD Price1.18 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.31 Neutral range Range of historically normal fluctuations.1.14 – 1.48 ValuationEuro neutral Currency pairUSD/JPY Price109.72 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.82.14 Neutral range Range of historically normal fluctuations.67.28 – 96.99 ValuationYen undervalued Currency pairUSD/CNY Price6.46 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6.24 Neutral range Range of historically normal fluctuations.5.99 – 6.48 ValuationRenminbi neutral
Source: Web Financial Group
There was little movement on the international currency markets last month. After falling further last month, commodity currencies strengthened again recently – at least in some cases. The Norwegian krone achieved the strongest gains, rising 3 percent against the Swiss franc, followed by the Swedish krone, which was up 1 percent. The Canadian and Australian dollars both recorded slight losses again. With the uptick in inflation in the euro zone, the Swiss franc is now valued fairly against the euro once more, based on purchasing power parity.
After recovering from its flash crash in early August, the gold price per troy ounce again slipped well below the USD 1,800-mark recently.
Indexed performance of gold in Swiss francs
100 = 01.01.2021
The flash crash in early August saw the gold price per troy ounce drop by USD 100 to just under USD 1,730. This lost ground was recouped over the following weeks, but gold has yet to exceed the USD 1,800 mark on a sustained basis. Prices fell well below this level again recently. Persistently high consumer price inflation in the USA – which stood at 5.3 percent in August – has not yet resulted in increased demand for gold.