Monthly report

CIO Report - March 2024

Markets

Financial markets continued to be characterised by the "soft landing" narrative in March, as global economic data continued to surprise on the upside. Most risky asset classes recorded above-average returns, with a rally on the equity markets, in particular, in which many indices reached new highs. The S&P 500 and the DAX, for example, gained around 10% in the first quarter alone. Meanwhile, high-yield spreads narrowed further and cryptocurrencies also performed strongly. Bonds recorded a weaker performance due to persistent inflationary pressure, as a result of which the markets priced in fewer interest rate cuts. This in turn supported the US dollar, which was the strongest G10 currency in the first quarter. There were also signs that investors were raising their inflation expectations and precious metals benefited in this environment, with the price of gold rising 9.1% to new highs in March alone. The surprising decision by the Swiss National Bank, which was the first central bank with a G10 currency to cut its key interest rate by 25 basis points to 1.50% in this cycle, was striking and further weakened the Swiss franc. In Japan, conversely, an important milestone was reached when the Bank of Japan ended its negative interest rate policy.

Outlook

There are still opposing forces at work: on the one hand, the economy, labour markets and consumption are cooling, which is also dampening inflation and interest rates. On the other hand, the still high supply of liquidity from the private banking system is providing a strong positive counterbalance with support for the economy, but also increased inflationary pressure. At the same time, the weaker US labour market is being met with a persistently restrictive monetary policy, as inflation remains stubbornly high. Similar trends can also be found in Europe. The economy is stagnating, while inflation persists at an elevated level. The latter is due to strong wage pressure and thus inflationary second-round effects. The positive and negative forces acting on equity and corporate bond markets therefore balance each other out. In fact, the positive impetus provided by high liquidity and continued strong inflows of funds into the corporate bond markets (investment grade and high yield) could even continue to drive prices higher for some time. However, equity and corporate bond valuations are now ambitious. In addition, market expectations are currently very high. Even a slight deterioration in the environment could quickly lead to disappointment. We are therefore positioning ourselves neutrally in terms of risk exposure and are waiting for monetary or technical market warning signals before taking out risk. Positive and negative forces are also acting simultaneously affecting government bond markets, particularly at the long end of the yield curve. Stubborn inflation and slightly rising inflation expectations, together with persistently high government spending (particularly in the US), are putting upward pressure on interest rates. On top of this, the change in monetary policy in Japan, which should not be underestimated, is likely to lead to less demand for government bonds in the US and Europe in the medium term. The Fed and the ECB are also continuing to sell government bonds on a large scale (QT), which is an additional negative factor. Conversely, the declining economic momentum is having a dampening effect on interest rates. Overall, we are therefore taking a neutral stance on duration.

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