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Market Insights, June 7, 2021

Each week, our Investment team shares its market views with you.

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Spectacular summer view of unique Oeschinensee Lake. Majestic morning scene of Swiss Alps with Bluemlisalp mountain on background, Kandersteg village location, Switzerland, Europe.

Essentials

In May, Chinese exports grew by 27.9% year on year, coming in slightly below the forecast. This represents a sequential decline of 6.4% after a rise of 9.4% in April and is another sign that exports are returning to normal levels after a very strong start to the year.

Switzerland’s manufacturing PMI – the main indicator of economic activity in the country – hit a record of 70 in May, showing just how buoyant the economic climate currently is.  Life is returning to normal, and economic indicators are also likely to return to less extreme levels in the coming months. 

The conservatives won a resounding victory in the regional elections in Saxony-Anhalt, which are considered a test for Germany’s general election in September.  This is a good sign for Angela Merkel’s successor as head of the party, which had been trailing in the polls.

Knock-on effects ?

The US economy created around half a million jobs in May. That’s quite a figure, but it’s still lower than expected for the second month in a row. In March and April of last year, the public health crisis and lockdown decimated the labour market. In just two months, close to 22 million jobs were wiped out in the States. And even though companies have gradually been rehiring people over the past year, the economy is still missing around 8 million jobs. 

That’s why the unemployment rate has stayed close to 6% – well above the pre-pandemic level of 3.5% – although the economy is now opening up. Yet the stage is now set for jobs numbers to improve. The rapid, large-scale vaccine rollout means the COVID-19 pandemic will soon be no more than a bad memory in the US. 

The easing of restrictions has picked up and life is almost back to normal, even in big cities. The services sector, which had long been lagging behind and employs a large proportion of the population, has also started to recover. That’s especially true for leisure, tourism and hotels and restaurants. 

Paradoxically, some companies are starting to complain about a lack of available labour. This is because some jobseekers seem to be putting off re-joining the workforce thanks to the generous cheques they’ve received as part of Joe Biden’s rescue package. The labour market will probably start to really pick up in the autumn, once these payments have stopped. For the US Federal Reserve, the risk of the economy overheating seems to have been avoided for the moment. 

But we must keep an eye on inflationary pressures. Some employers will have no choice but to raise wages in order to attract new workers. This combination of rising commodity prices and wages is not something central bankers usually like to see. While the US bond market was reassured by the disappointing jobs figures, wage rises are still a weight on the Fed’s shoulders.

There’s no doubt that the question of normalising monetary policy will be on the agenda at its upcoming meetings. After levelling off over the past three months, long-term interest rates will almost certainly start heading upwards again.

Are oil and ESG closely linked ?

The growing importance of ESG investing has started to affect oil companies. In May, a court ruled that Shell had to cut carbon emissions by 45% by 2030. More recently, the ESG-oriented investment firm Engine No. 1 got three activist members elected to ExxonMobil’s board to help the company transition away from fossil fuels. And more than 40 global banks have come together to pledge to considerably reduce the carbon emissions in their lending portfolios. 

These developments are all part of an underlying trend that will greatly reduce listed companies’ investments in the oil sector, probably to the level seen in 2020 – the year of the pandemic.

This move may be good for the environment, but it will cause other problems – demand for oil probably won’t peak until 2030 and the current energy system is still 80% reliant on fossil fuels. If large, listed companies are no longer investing to ensure supply, Opec will gain in importance, as will its ability to influence prices. Studies analysing the budgets of various Middle Eastern countries suggest that the new oil price equilibrium will be USD 80 per barrel. 

Once the current discussions on ramping up post-COVID output are behind us, we think Opec will want to use its renewed influence to keep oil prices close to this equilibrium. It would be quite the paradox if the growing importance of ESG investments actually boosts oil prices.

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