Global Strategy 3Q 2022
Ongoing geopolitical tensions and supply-side shortages are leading to high inflation rates and a weaker economic outlook. In this tension field, central banks are tightening monetary policy. Weaker economic data could cause interest rate expectations to fall by the end of the year, and we expect government bond yields in the medium and longer maturities to decline. On the stock market, we expect a volatile sideways movement in view of the pronounced uncertainty.
Economy: High inflation is leading to real wage losses and rising interest rates are further dampening purchasing power. Consumer sentiment has plummeted in both the US and the euro zone, and private consumption is suffering. Companies are also less inclined to invest in this environment, which is characterized by continuing uncertainty. In addition, supply chain problems are again intensifying in Europe, dampening industrial production. While we expect very weak growth in the US economy, Europe could experience temporary growth support this year due to the regained freedom to travel and could also benefit from money from the EU recovery fund. Serious downside risks to the economy would come from significant cuts or a halt in Russian natural gas supplies. Inflation has recently remained at high levels, with broader price rises increasingly taking hold alongside energy and food prices. We expect a certain easing by the fall, but inflation should come down only slowly.
Bonds: The Fed signalled its intention to implement faster rate hikes when it tightened monetary policy in June. However, the bond markets reacted only cautiously to this, with yields on 10-year US Treasuries actually falling. The bond markets first have to digest the tension between high inflation and expected weaker economic data. Inflation rates should fall slightly in Q4 and, in conjunction with a weaker economy, we do not expect any further interest rate hikes in the USA from the end of the year for the time being. Already in the run-up, the yield curve should become inverted. The ECB will raise rates by 25 bps in July and a stronger rate hike of 50 bps could follow in September if medium-term inflation forecasts remain unchanged or worsen. In December, the ECB will focus on 2024 and 2025. Lower inflation forecasts for this period could justify a longer pause in rate hikes. Yields on medium and longer maturities should fall slightly.
Currencies: The uncertain environment allows safe haven currencies to profit for the time being. In the medium term, the relative adjustment of monetary policy will be decisive. This argues for a weaker dollar and an essentially stable Swiss franc. Real negative yields continue to support the gold price.
Equities: We expect the global equity market to trend sideways in 3Q, with high volatility. Weaker leading indicators suggest lower earnings momentum in 2Q, especially compared to the strong prior year. Excluding US energy company earnings, US earnings would fall -1.8% (y/y) in 2Q instead of rising +5.8% (y/y). In Europe, gas supply cuts and supply chain issues could weigh on the industry.