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.

  • 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.

    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 led to a sell-off on the bond markets, particularly in the USA, and long-term interest rates rose sharply. This trend came to an end in the middle of the year. Prices have since been climbing again.
    Source: SIX, Bloomberg Barclays

    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

    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. The trend briefly reversed in the first half of 2021, and interest rates fell. However, a continuation of the long-term trend is now apparent. US 10-year yields to maturity currently stand at 1.3 percent, while those in Switzerland and Germany lie at just under –0.3 percent.
    Source: SIX, Bloomberg Barclays

    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

    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 2020. This meant that higher-risk debtors had to pay more interest than secure government issuers when borrowing. Due to the economic recovery, the credit spreads that are being demanded have plummeted sharply again and have already returned to below pre-crisis levels.
    Source: Bloomberg Barclays

    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

    This graphic shows the performance of the stock markets in Switzerland, worldwide and in emerging markets in Swiss francs over the past 12 months. There was a phenomenal recovery rally after the huge sell-off in spring 2020. Both the US and Swiss stock exchanges have now not only reached but actually exceeded their pre-crisis levels.
    Source: SIX, MSCI

    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

    In percent

    The graphic shows the momentum of 17 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. Brazil, India and Taiwan are currently leading the way. The Chinese equity market is trailing behind once again this month.
    Source: MSCI

    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.

    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. Valuations fell further last month following corrections to emerging market equities. By contrast, Swiss equities made further gains, leading to another rise in valuations.
    Source: SIX, MSCI

    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

    The graphic shows the indexed average performance of listed Swiss real estate funds over the past 12 months. After recovering from the slump in March 2020, 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 predominantly trended sideways at the start of the year, before making strong gains in the second quarter and hitting new record levels.
    Source: SIX

    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

    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. After the Swiss real estate market recovered to its year-opening level, premiums have risen sharply again since the start of the year, hitting new record levels of almost 50 percent.
    Source: SIX

    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)

    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

    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.

  • Currencies

    Demand for “safe-haven currencies” climbed again last month. In contrast, commodity currencies posted losses.

    Currency pairPricePPPNeutral rangeValuation
    Currency pair
    EUR/CHF
    Price
    1.08
    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
    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.
    0.86
    Neutral range Range of historically normal fluctuations.
    0.75 – 0.96
    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.
    1.40
    Neutral range Range of historically normal fluctuations.
    1.21 – 1.60
    Valuation
    Pound sterling neutral
    Currency pair
    JPY/CHF
    Price
    0.84
    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
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.59
    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
    Valuation
    Krona neutral
    Currency pair
    NOK/CHF
    Price
    10.40
    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
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.18
    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
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    109.84
    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
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.46
    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
    Valuation
    Renminbi 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.

    Gold

    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

    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. Demand for gold has risen again since April. In July, the price per troy ounce hit the mark of 1,800 US dollars once again.
    Source: Web Financial Group

    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.

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