The bond markets were caught between the conflicting priorities of continued tight monetary policy and the increasingly gloomy economic outlook. The bond markets barely shifted in this environment.
Market overview: Financial markets falter
The continued restrictive monetary policy and gloomy economic outlook have caused the financial markets to falter. Momentum has slowed significantly on both the equity and bond markets.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2023
Inflation rates in the western industrial nations are still showing little sign of weakening, leading the central banks to continue raising interest rates. Both the US Federal Reserve and European Central Bank raised their policy rates by a quarter percent again in May. The Bank of England followed suit with an increase of 25 basis points. However, growing fears of recession and a greater emphasis on financial stability have alleviated pressure to hike rates to some extent. In this difficult environment, bonds predominantly trended sideways.
Trend in 10-year yields to maturity
The central banks and fears of recession look to be holding long-term yields to maturity in check. Interest rate policy remains tight with inflation still high. However, there are growing signs of recession in the real economy. This means long-term government bonds have barely shifted. Yields to maturity on 10-year US government bonds are fluctuating around 3.5 percent, while they fell slightly in Switzerland to 1.0 percent.
Credit spreads on corporate bonds
In percentage points
Credit spreads on corporate bonds barely changed last month. While they remain relatively high, they are still well below the level reached during the financial or euro crisis, or even during the coronavirus pandemic. Investors have not been particularly unsettled by the increasingly gloomy economic outlook or the US banking crisis up to now.
The upturn on the stock market since the turmoil surrounding Silicon Valley Bank faltered last month. The ever gloomier economic outlook may be having a growing impact in this respect.
Indexed stock market performance in Swiss francs
100 = 01.01.2023
The stock markets increasingly faltered last month. European equity markets generally trended sideways, while emerging market equities fell sharply. The Swiss franc’s continued strength resulted in further declines in the performance of Swiss investors’ portfolios. Yet, the Swiss and Japanese stock markets were surprisingly robust. The Swiss equity market was boosted by the strong performance of Novartis, an index heavyweight. Novartis released better-than-expected financial figures in the first quarter of 2023. The outlook for the equity markets nevertheless remains challenging. Real economic data is increasingly pointing towards recession, monetary policy looks set to remain tight due to continued inflationary pressure and the world’s biggest economy is not just contending with a banking crisis, but also with the debt ceiling.
Momentum of individual markets
The faltering momentum on the equity markets is also reflected in growth rates, which have declined sharply, particularly on the European equity markets. However, growth rates also fell on Asian equity markets such as China. The Chinese equity market has been subdued this year, and actually fell sharply last month. One contributory factor may be the recently published weak figures for domestic demand in China, which have held back the anticipated economic upturn. In contrast, the Swiss and Japanese equity markets built on the positive momentum of the previous month.
The earnings recession is continuing. In the USA, companies recorded declining profits for the second consecutive quarter. The fall in earnings suggests that the price/earnings ratio (P/E ratio) will remain high and equities will be more expensive relative to earnings. Despite the recent rise, P/E ratios remain at a slightly lower level than in the five years before the coronavirus pandemic.
The prices of exchange-listed Swiss real estate funds fell last month despite lower interest rates. The continued restrictive monetary policy pursued by the Swiss National Bank is likely to create additional headwinds.
Indexed performance of Swiss real estate funds
100 = 01.01.2023
Exchange-listed Swiss real estate investments endured a volatile month and ended up lower, month-on-month. The tightening of monetary policy by the Swiss National Bank (SNB) is increasingly being felt on the real estate market. The SNB is likely to continue hiking interest rates given persistent inflationary pressures in Switzerland and the huge gap in rates relative to its European neighbours. This may heap further pressure on the real estate market.
Premium on Swiss real estate funds and 10-year yields to maturity
Premiums, or the surcharge on the book value of properties in exchange-listed real estate funds in Switzerland, fell last month despite the moderate decrease in interest rates. If we compare premiums with Swiss capital market interest rates, these investments are now slightly undervalued. Yet, if the Swiss National Bank continues to pursue its tighter monetary policy, premiums may come under further pressure.
3-month SARON and 10-year yields to maturity
The Swiss National Bank (SNB) is likely to maintain its restrictive monetary policy due to persisting inflationary pressure and significant difference in interest rates in relation to the European Central Bank. In this context, market participants expect the SNB to increase its policy rate again in the course of the year. However, at just under 50 base points, the rise will be much lower than in March. Market participants also anticipate a reduction in the policy rate from March 2024. The market expectation has fallen considerably as a result, reflecting the greater importance attached to financial stability in monetary policy, as well as the growing risk of recession in western industrial nations.
The US dollar lost momentum recently, but we have not seen any trend reversal yet. Meanwhile, the losers included the Japanese yen and the commodity currencies.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price0.97 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.84 Neutral range Range of historically normal fluctuations.0.78 – 0.91 ValuationEuro overvalued Currency pairUSD/CHF Price0.90 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.80 Neutral range Range of historically normal fluctuations.0.69 – 0.90 ValuationUSD overvalued
Currency pairGBP/CHF Price1.12 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.21 Neutral range Range of historically normal fluctuations.1.05 – 1.38 ValuationPound sterling neutral Currency pairJPY/CHF Price0.65 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.93 Neutral range Range of historically normal fluctuations.0.78 – 1.09 ValuationYen undervalued Currency pairSEK/CHF Price8.54 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.9.88 Neutral range Range of historically normal fluctuations.8.88 – 10.88 ValuationKrona neutral Currency pairNOK/CHF Price8.26 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.10.70 Neutral range Range of historically normal fluctuations.9.55 – 11.85 ValuationKrone undervalued Currency pairEUR/USD Price1.08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.06 Neutral range Range of historically normal fluctuations.0.92 – 1.19 ValuationEuro neutral Currency pairUSD/JPY Price137.97 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.85.41 Neutral range Range of historically normal fluctuations.67.82 – 102.89 ValuationYen undervalued Currency pairUSD/CNY Price7.02 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.5.81 Neutral range Range of historically normal fluctuations.5.45 – 6.16 ValuationRenminbi undervalued
Source: Web Financial Group
Despite the US dollar regaining momentum recently, there has been no reversal in the downward trend observed since autumn 2022. The increasingly gloomy economic outlook, the challenging situation in the banking sector and the debt ceiling crisis are likely to have contributed to the downward trend. However, the US currency remains significantly overvalued on a trade-weighted basis, which means it may depreciate further.
Meanwhile, the commodity currencies, such as the Norwegian krone and Australian dollar, were much weaker. Lower energy prices were a major factor in the depreciation of these currencies. Exports from these countries depend heavily on energy resources. The Japanese yen also showed weakness. Japan’s central bank reaffirmed its commitment to an ultra-expansive monetary policy, which is likely to have weighed on the Japanese currency.
The price of gold remains high, despite falling slightly as the US dollar strengthened. The gold price nevertheless still remains at the upper end of the corridor observed since August 2020.
Indexed performance of gold in Swiss francs
100 = 01.01.2023
The gold price remains high, despite the precious metal’s recent modest decline as the US dollar strengthened. The price of gold is therefore still elevated. The flight to this asset class, which is seen as a safe haven, is due in particular to uncertainty regarding the stability of the financial system and ongoing high inflation. The weakness of the US dollar also had a positive impact on the price of gold. Yet, following the recent strengthening of the US dollar, the value of gold has fallen moderately.