US interest is defying high inflation rates and is falling. There is no indication of greater risk sentiment in the credit spreads on corporate bonds.
Market overview: Downward pressure on interest
Bonds have made surprising gains on the financial markets in recent times. The equity markets currently seem to have lost some momentum – but the US equity market is bucking this trend.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2021
Bonds have made surprising gains in the past month. Despite the generally bright economic outlook, high inflation rates in the USA and the US Federal Reserve’s plans to withdraw from its extraordinarily expansive monetary policy, the securities remained in strong demand. US bonds achieved the best returns last month. There was also strong demand among investors for Japanese and UK government bonds. Swiss securities gained slightly less in value.
Trend in 10-year yields to maturity
The strong economic recovery over recent months has sustained optimism on the financial markets and has caused investors to focus more on higher-risk asset classes. But long-term interest rates have recently returned to their long-term downward trend. The yields to maturity on 10-year US government bonds have fallen most dramatically. After the year high of over 1.7 percent, the yields to maturity slipped back to 1.3 percent again in mid-July. There is also increasing downward pressure on interest rates in Europe. As a result, the yield to maturity on 10-year Swiss government bonds fell by two base points to below –0.3 percent last month. The value of their German counterparts declined almost in parallel.
Credit spreads on corporate bonds
While investors on the financial markets were somewhat more restrained again last month, the credit spreads on corporate bonds remain at their record-low level. The European Central Bank is continuing its bond-buying programme for the time being, but is increasingly focusing on environmental criteria when selecting companies. In contrast, its US counterpart, the Federal Reserve, recently announced plans to gradually offload corporate bonds it has purchased.
The record-breaking rally on global stock exchanges is slowing down. European securities in particular lost significant momentum last month. By contrast, US equities made further gains.
Indexed stock market performance in Swiss francs
100 = 01.01.2021
The international stock exchanges slowed down considerably around the middle of the year, after previously achieving one record after the next. European securities, which had gained significant momentum over the two previous months, fell again slightly. In light of the strong growth trend in the first half-year, however, the increase still stands at 14 percent. Emerging market equities also suffered losses last month. The difficulties with containing the Delta variant may have been a factor in this. By contrast, the Swiss and US equity markets withstood the downward pressure, making further gains last month.
Momentum of individual markets
The slowdown in recovery momentum last month was evident on almost all equity markets worldwide. The US proved an exception. Its resilience is mainly due to its large share of technology firms. This sector achieved the most growth (8 percent) last month – not least thanks to a further cut in interest rates. As in the previous month, Brazil is currently displaying the strongest momentum. It is followed by India and Taiwan in second and third place. By contrast, the Chinese equity market continues to struggle, with regulatory measures on tech firms still creating headwind.
In the wake of the economic upturn, companies’ profit performance has also recovered astonishingly quickly from the crisis. Despite this, equity valuations remain at a high level when measured by price/earnings ratio. Dutch, Indian and US equities currently have the highest valuations. The P/E ratio of Swiss equities currently stands at 25, which means that they are still below the valuations from the period 2017 to 2020.
The Swiss real estate market is continuing to set records. This has also triggered a huge rise in premiums.
Indexed performance of Swiss real estate funds
100 = 01.01.2021
Since the brief correction in May, indexed Swiss real estate funds have resumed their upward trend and recently achieved record high levels again. Price gains of 3 percent were achieved last month alone. This means that prices are up by around 7 percent on the year-opening level. In real estate investments, the trend is currently heading in only one direction worldwide – and that’s upwards. In the USA, Europe and Japan, real estate investments have gained by more than 10 percent, and some by as much as 20 percent, since the start of the year. These price rises are also driving up valuations to a significant degree.
Premium on Swiss real estate funds and 10-year yields to maturity
There seems to be no limit to the increase in the prices of indexed Swiss real estate investments at present. The average premiums achieved are also continuing to reach unprecedented highs. Investors have of late been paying a premium of almost 50 percent above the value of the properties contained in the funds. As a result, premiums have soared by 25 percent in this calendar year alone. This development seems surprising in light of the continued low interest levels.
Vacancy rate and real estate prices
100 = January 2000 (left) and in percent (right)
The continuing low interest rate environment is making real estate a very attractive investment. This is compounded by the trend of spending more time at home, which has been triggered by the pandemic and has also put living space in the spotlight. However, the increased demand for living space is not just reflected in the high real estate prices, but also in the demand for mortgage loans, which rose once again last year. In Switzerland alone, the volume of mortgage loans stands at 1,100 billion Swiss francs. That is almost 1.6 times the Swiss GDP. This ratio has increased enormously over the past 20 years in particular. In 2000, it was still 1:1.
Demand for “safe-haven currencies” climbed again last month. In contrast, commodity currencies posted losses.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.13 Neutral range Range of historically normal fluctuations.1.05 – 1.21 ValuationEuro neutral Currency pairUSD/CHF Price0.92 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.86 Neutral range Range of historically normal fluctuations.0.75 – 0.96 ValuationUSD neutral Currency pairGBP/CHF Price1.27 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.40 Neutral range Range of historically normal fluctuations.1.21 – 1.60 ValuationPound sterling neutral Currency pairJPY/CHF Price0.84 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.03 Neutral range Range of historically normal fluctuations.0.87 – 1.19 ValuationYen undervalued Currency pairSEK/CHF Price10.59 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.11.31 Neutral range Range of historically normal fluctuations.10.22 – 12.41 ValuationKrona neutral Currency pairNOK/CHF Price10.40 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.41 Neutral range Range of historically normal fluctuations.11.07 – 13.74 ValuationKrone undervalued Currency pairEUR/USD Price1.18 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.32 Neutral range Range of historically normal fluctuations.1.14 – 1.49 ValuationEuro neutral Currency pairUSD/JPY Price109.84 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.83.25 Neutral range Range of historically normal fluctuations.68.27 – 98.24 ValuationYen undervalued Currency pairUSD/CNY Price6.46 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6.33 Neutral range Range of historically normal fluctuations.6.08 – 6.57 ValuationRenminbi neutral
Source: Web Financial Group
Following the US Federal Reserve’s announcement of plans to attempt to withdraw from its expansive monetary policy more quickly, the US dollar gained by over 3 percent. The two most popular “safe-haven” currencies – the Swiss franc and the Japanese yen – also saw a spike in demand. In contrast, the commodity currencies – including the Canadian and Australian dollars – suffered significant losses, despite another rise in the oil price last month.
After a slump in mid-June, the gold price edged up again in July, thanks to higher inflation figures and falling interest rates.
Indexed performance of gold in Swiss francs
100 = 01.01.2021
After breaking through the mark of 1,900 US dollars per troy ounce at the start of June, the price of gold tumbled abruptly by almost 150 US dollars. This slump coincided with the US Federal Reserve’s announcement of plans to begin withdrawing from its expansive monetary policy. Interest rates and the US currency both rose as a result. Both have a negative effect on the price of gold. However, the trend has reversed again since early July due to the high inflation rate of 5.4 percent for the month of June and falling interest rates.