The prospect that central banks will continue pursuing restrictive monetary policy saw yields to maturity on the bond markets rise so sharply that the losses suffered are amongst the highest monthly falls ever recorded for the asset class.
Market overview: Rising interest rates trigger more turmoil on the equity markets
The recovery rally on the equity markets over the summer months was short-lived. After the announcement of higher than expected US inflation figures, the financial markets were hit for a second time by concerns over further aggressive interest rate hikes.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2022
The losses on the bond markets are continuing in the third quarter. The markets briefly hoped that central banks would raise key rates as a temporary measure only and then cut them again in the event of recession. The clear pledge made by central banks to pursue an aggressive policy aimed at combating inflation – in other words, further interest rate hikes – dashed these hopes. The value of government bonds worldwide fell by around 3 percent last month, while that of Swiss bonds with a 20- year term dropped by almost 6 percent.
Trend in 10-year yields to maturity
Capital market interest rates climbed sharply last month and are now close to their high for the year. The yields to maturity on 10-year US government bonds almost reached the mark of 3.5 percent once again, while their Swiss counterparts recently stood at 1.1 percent, which means that they more than doubled. A key factor in this rapid increase may have been the clear monetary policy signals from the central banks that they are still giving highest priority to the fight against inflation – even if this comes at the expense of the economy.
Credit spreads on corporate bonds
Fears over recession also hit corporate bond prices. In Europe in particular, investors are concerned about an energy shortage and the impact that this would have on companies. As a result, there was a significant rise in the credit spreads on higher-risk corporate bonds compared with government bonds, which are seen as more secure. It is telling that European high-yield bonds are being classified as higher risk than US high-yield bonds for the first time since the European debt crisis.
The summer rally on the equity markets was short-lived. Investors received an abrupt reminder that the economic challenges presented by inflation and the energy crisis have not gone away.
Indexed stock market performance in Swiss francs
100 = 01.01.2022
The summer upturn on the equity markets faded away in the second half of August. Firstly, the clear message from central banks had a negative impact on price trends and resulted in a rise in interest rates. The publication of US consumer price inflation in early September then confirmed the ongoing economic challenges. This led to one of the greatest single-day losses on the US stock exchanges since summer 2020. US equities, measured in Swiss francs, are down by around 12 percent since the start of the year. The European equity market has suffered even greater losses, tumbling by around 20 percent.
Momentum of individual markets
Momentum on the equity markets weakened again last month, due to heavy price losses in recent weeks. Taiwan, South Korea and Germany are again lagging behind. Conversely, the Indian equity market is a positive anomaly. The Indian economy recently posted surprisingly strong growth in the second quarter – 13.5 percent year-on-year. But whether this positive momentum can be maintained is doubtful, considering the weak currency and high government spending.
Owing to rising corporate profits and falling equity prices in early 2022, price/earnings (P/E) ratios worldwide have decreased significantly since summer 2020. Equity markets are already increasingly posting stagnating profit growth, including in Switzerland. Conversely, equity markets with a large quota of companies in the energy sector – such as France and the UK – are continuing to achieve profit growth.
Rising interest rates also did not spare Swiss real estate investments last month. Quite the opposite: prices fell back to this year’s July low point.
Indexed performance of Swiss real estate funds
100 = 01.01.2022
During the summer rally, Swiss real estate investments recouped more than half of their losses since the start of the year. However, this asset class was unable to evade the recent downturn on the financial markets and also recorded losses. Listed Swiss real estate investments are now approaching this year’s July low point once again.
Premium on Swiss real estate funds and 10-year yields to maturity
The sharp price corrections on the Swiss real estate market last month resulted in another fall in premiums. On average, premiums of 12 percent are now being demanded. By comparison: two years ago, the average premium paid was four times higher. Higher capital market interest rates on the Swiss market are also having an impact on the trend for premiums.
3-month SARON and 10-year yields to maturity
Interest rate instruments are also traded on the futures markets. This enables the interest rate forecasts used in market trading to be determined. Market participants currently anticipate that the short-term SARON interest rates in Switzerland will rise to just under 2 percent by mid-2023. That would be much higher than the current and forecast yields on 10-year government bonds.
The US dollar has started to soar again, and the Swiss franc also made gains on a broad basis. However, the euro is struggling under the severe pressure of the energy crisis.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price0.96 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.83 Neutral range Range of historically normal fluctuations.0.77 – 0.89 ValuationEuro overvalued Currency pairUSD/CHF Price0.96 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.74 Neutral range Range of historically normal fluctuations.0.65 – 0.84 ValuationUSD overvalued
Currency pairGBP/CHF Price1.10 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.24 Neutral range Range of historically normal fluctuations.1.07 – 1.41 ValuationPound sterling neutral Currency pairJPY/CHF Price0.67 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.97 Neutral range Range of historically normal fluctuations.0.81 – 1.12 ValuationYen undervalued Currency pairSEK/CHF Price8.95 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.9.26 Neutral range Range of historically normal fluctuations.8.38 – 10.15 ValuationKrona neutral Currency pairNOK/CHF Price9.45 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.10.55 Neutral range Range of historically normal fluctuations.9.42 – 11.67 ValuationKrone neutral Currency pairEUR/USD Price1.00 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.12 Neutral range Range of historically normal fluctuations.0.97 – 1.26 ValuationEuro neutral Currency pairUSD/JPY Price143.49 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.76.80 Neutral range Range of historically normal fluctuations.61.75 – 91.84 ValuationYen undervalued Currency pairUSD/CNY Price6.99 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.5.51 Neutral range Range of historically normal fluctuations.5.23 – 5.79 ValuationRenminbi undervalued
Source: Web Financial Group
After a brief lull, the US dollar is soaring again, climbing to a new 20-year high. This trend was reinforced by expectations that central bank policy will remain restrictive and by very solid data from the US economy, despite high inflation. The Swiss franc also strengthened last month, making gains against almost all currencies. The euro is still being severely hit by the energy crisis. After breaking through parity with the franc in July, the EUR-CHF rate now stands at 0.96.
The downward price trend for gold continued last month. The price per troy ounce recently fell to just 1,660 US dollars.
Indexed performance of gold in Swiss francs
100 = 01.01.2022
Since hitting a record high of over 2,050 US dollars per troy ounce at the outbreak of the Ukraine conflict, the price of gold has continually fallen. It recently plummeted to just 1,660 US dollars – its lowest level in two years. For Swiss investors, losses have been much more limited – down just under 2 percent since the start of the year – due to the strong Swiss franc.