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Market Insights, May 30, 2022

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

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2022.05.30-point-des-marches-piguet-galland-banque-investissements

Essentials

The European Central Bank, which is lagging several months behind its peers, will wrap up its quantitative easing this summer. The asset purchase programme will be brought to an end, and an initial rate hike could take place in July. The ECB will, however, raise rates at a slower pace than other central banks in the developed world, which we think will limit the euro’s upside.

Sentiment may have bottomed out in China, given the easing of COVID-19 restrictions announced this weekend and the government’s renewed message of support for the economy last Wednesday. In a videoconference involving hundreds of thousands of civil servants, Premier Li Keqiang recognised the need to stabilise the ailing economy in Q2.

In May, US consumer confidence dropped to its lowest level since the height of the 2008 financial crisis more than 13 years ago. Stubborn inflation means household morale is extremely low. However, there are initial signs that consumer prices are normalising, which should boost consumer confidence over the coming months and, in turn, shore up the stock markets.

US inflation has probably passed its peak

Recently, there have been more signs that inflation may be slowing in the States. It’s true that energy prices continue to weigh on consumers’ wallets, with petrol prices hitting new highs even before the summer driving season gets under way. But after soaring for several months, most commodity prices have levelled off in recent weeks, and some – including industrial metals such as copper, nickel and aluminium – have even declined.

On top of that, maritime transport costs, which reached their highest level in several decades at the end of 2021, have started to decline for most major routes. This inflationary easing is starting to be felt further along the supply chain too. The US Federal Reserve’s preferred indicator, the Personal Consumption Expenditures (PCE) deflator, suggests that the worst is behind us when it comes to inflation. It has been heading downwards for two months now, at least when volatile components such as energy and food are excluded. It put core inflation at just 4.9% year on year. This is, of course, still too high for the Fed and does not mean the rate hikes expected at the next two meetings won’t go ahead.

But if inflation continues to slow over the summer, this will provide some reassurance and could mean that the Fed will hold off on further rate hikes at its later meetings, to prevent the economy from being stifled by excessive tightening. The financial markets reacted well to this slight fading of inflation fears. Yields on long-term US Treasuries stopped heading upwards, and risk assets started to pick up again. After rebounding sharply over the past two months, risk premiums on low-quality bonds, particularly high yields, started to decline. The drop in risk aversion is reflected across asset classes.

Equities have been bouncing back over the past few days. This includes growth stocks, which had plummeted to depressed levels. It looks like the rally we had forecast for the US stock market is now under way. This should wipe out some of the losses recorded so far his year. And other stockmarkets should also reap the benefits.

Commodities – energy prices still on the rise

Since we shared our constructive view on energy, the sector has held up very well, with demand continuing to outweigh supply. We remain bullish on the sector and think that the upward pressure could even intensify over the summer.

US natural gas has fared the best recently, with demand higher than normal for the season because of the weather. In addition, Europe is looking to reduce its reliance on Russian energy, prompting an increase in demand for liquified natural gas, and the US is now very close to full export capacity. Although we wouldn’t be surprised to see some profit-taking on gas, it should have only a limited impact on diversified investment products.

Oil prices are still rising but at a more moderate pace. It took several months for the market to fully digest the price increase sparked by the invasion of Ukraine, but we think that oil prices are now rising at a more sustainable pace. They continue to be buoyed by numerous factors. And even though prices have gone up, oil companies continue to exercise restraint and haven’t increased their exploration budgets, bowing to pressure for them to become greener.

Russian output has dropped only slightly, but the buyers are now in Asia rather than Europe, which more than doubles the transport times by boat. Lastly, demand remains high given the expected uptick in travel as China gradually comes out of lockdown and life returns to normal.

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