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Market Insights – 17th of June 2019

Each week, a team of experts shares its market views with you.

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Essentials

This week, all eyes will be on the US Federal Reserve, which is meeting on Wednesday evening. Investors will be looking for confirmation that the Fed is getting ready to cut rates over the summer. Jerome Powell mustn’t get it wrong, and the markets already seem to be pricing in one, if not two, rate cuts by the Fed’s September meeting.

Growth expectations for the eurozone remain low, with industrial output down 0.5% in April, in line with forecasts. While the German economy continues to be dragged down by its manufacturing sector, leading indicators suggest that the worst is now behind us. Meanwhile, the French economy is bouncing back.

China’s May figures are not particularly encouraging: growth in industrial output slowed to 5%, and imports were down 8.5% year on year. However, there are some base effects to factor in: imports, for example, rose sharply over the same period last year, primarily because of pre-orders.

The SNB waves goodbye to the Libor

For many Swiss households, the Libor is a benchmark rate used to determine the interest rate on their variable-rate mortgage loan. For the Swiss National Bank, it is the benchmark rate on which it bases its monetary policy. But various flaws in the rate have come to light in recent years. Most importantly, Libor is not always the rate actually applied on the interbank market in London. It’s often more of an estimate of the rate at which major banks are prepared to lend each other money. This made it possible to manipulate these rates, with several key financial institutions receiving fines for doing so. This prompted UK regulators to stop using the Libor as of 2021. The SNB decided not to wait so long, and announced at its last meeting that it would drop the Libor straight away and instead use an official policy rate like other major central banks around the world. Unsurprisingly, to ensure continuity, that rate has been set at –0.75% and is based on the Swiss Average Rate Overnight (SARON), which will gradually become the benchmark for various Swiss-franc-denominated financial instruments. Investors had been expecting this announcement, which has cleared up any uncertainty about what will replace the Libor on the Swiss mortgage market. The SNB wants to ensure a smooth transition to this new benchmark and avoid unsettling the property market, which it believes is close to overheating. It has not missed an opportunity to get this message across to commercial banks in recent months, despite flooding them with surplus liquidity as part of its policy to try and rein in the Swiss franc. The Swiss banking sector will have to come to terms with this new situation, since it looks like negative interest rates will be around for a while in Switzerland. Looking beyond the property market, the Swiss stock market is also being boosted by the pressing need to find returns. With bond yields at rock bottom (–0.5% on ten-year Confederation bonds), the dividend yields offered by Swiss large caps are drawing in investors – especially institutional investors. This pushed the SMI and SPI to new record highs (based on reinvested dividends) last week. Even the turbulent geopolitical climate has not interfered with this trend.

Commodities – will gold get a boost from rising fears?

Commodity indexes have bounced back since the start of the year but haven’t reached the highs recorded in 2018, and they have even started dropping off again recently. This trend is mainly affecting metals and energy, and reflects fears about global growth. Even the attacks on two tankers in the Strait of Hormuz, through which close to 30% of seaborne oil is transported, was not enough to push oil prices higher. For a rebound to set in, we probably need more visibility about how supply and demand will balance out.

Gold is experiencing a very different trend. It has been stuck in a range of USD 1’110–1’350 per ounce since 2013, dragged down by the Fed’s rate hikes and the appeal of risk assets. Demand remains stable at around 4’000t per year, although central banks have upped their purchases over the past 12 months. Marginal demand continues to come from investors, who use gold as a safe haven in uncertain times. Given the Fed’s change in tone and improving market sentiment, if gold prices break through resistance levels (USD 1’350–1’375 per ounce), more substantial gains could follow.

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