Market Insights, September 5, 2022

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The S&P 500 is in a technical weak spot, especially after the market ended the week in negative territory. The rally that began in mid-June could be in jeopardy if prices drop below current support levels. We therefore remain cautious in the short term, particularly in the run-up to the 21 September meeting of the US Federal Reserve (Fed).

After consolidating briefly, gas prices are on the rise again in Europe following Gazprom’s announcement that it would halt supplies through its pipeline. Europe’s leaders are aware of the impact this decision could have on the electricity market and are taking steps to contain the damage.

The euro has again fallen below parity with the US dollar, reaching its lowest level since 2002. The dollar is particularly strong at the moment, and the euro has been weighed down by the region’s gloomy economic outlook. Given the uncertainty, we are still cautious on the European currency.

SNB – negative rates will soon be a thing of the past

We didn’t hear much from the Swiss National Bank (SNB) over the summer, except when President Thomas Jordan made a somewhat run-of-the-mill speech at the Jackson Hole symposium. Like other central banks, the SNB is working to keep inflation under control, although it made sure it had a relatively quiet summer by pre-emptively raising rates in June and indicating that it would tolerate some appreciation in the franc. The aim of that move was, of course, to rein in inflation, especially imported inflation.

But prices are still soaring, so it’s time for Switzerland’s central bankers to get back to work. Admittedly, inflation is lower in Switzerland than it is elsewhere – in some European countries, for instance, it’s two to three times higher than here. But prices are going up at an annual pace of 3.5%, which is still uncomfortably above the SNB’s target. There is therefore every reason to believe that the SNB will raise rates again at its next meeting, on 22 September, bringing an end to the era of negatives rates. Back in January 2015, very few financial players thought that negative rates would still be in place almost eight years later – an eternity in monetary policy terms.

There’s even a chance that the SNB will make a move before 22 September. The European Central Bank will meet on 8 September and is expected to hike rates sharply. Some economists think that rates will be raised by three quarters of a percentage point in an attempt to curb inflation, which is still soaring in the eurozone. This could prompt Thomas Jordan and his colleagues to do the same. It wouldn’t be the first time the SNB has taken action outside an official meeting. Just like his counterpart at the Fed, Jordan is likely to adopt an aggressive stance on inflation. In this climate, both Swiss government bond yields and the franc will probably continue moving upwards for some time – at least until the rise in Swiss consumer prices starts showing signs of easing. Investors will therefore be keeping a close eye on energy prices this autumn.

USA – a soft landing seems likely

US stock markets remain extremely volatile, with the S&P 500 losing ground for the third week in a row. Investors are nervous about the Fed’s upcoming meeting, when Jerome Powell is expected to raise rates by three quarters of a point. But by tightening monetary policy so drastically in an attempt to rein in inflation, could the Fed plunge the country’s economy into recession? Recent financial market movements suggest that investors think it could. However, we still expect a soft landing for the US economy, particularly given the macroeconomic data published in recent weeks.

The ISM manufacturing index – a key indicator of economic activity – came in much better than expected in August. It may be heading downwards but it is still firmly in expansionary territory. In addition, job creation figures are still solid, unemployment is rising and wage growth is slowing. This suggests that inflation will continue to return to more normal levels. That could, in turn, convince Jerome Powell to adopt a more accommodative tone, provided inflation drops more sharply in the coming months.


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