Monday Markets Mail (CW 33)

Is there Light at the End of the Tunnel?

Since mid-June, both the stock markets and the bond markets have performed well. In view of growing fears of an approaching recession, this development in the case of bonds is easily explainable. The prospect of interest rate hikes that are not so drastic after all has ensured a positive price trend on the bond markets. The gains in equities, on the other hand, are surprising. What happened?

Falling crude oil prices cause share prices to rise
The easing is accompanied by falling crude oil prices. For example, the general crude oil benchmark quote WTI (Western Texas Intermediate) recorded its last high of around USD 122 on June 14 and was quoted at around USD 90 on August 16. As high as before the start of the war in Ukraine. This development can now be interpreted in two ways. First, as a clear easing on the inflation front. After all, there were fears that the price of crude oil could rise to USD 150. Secondly, as a cooling of demand or of the economy in general. The question here is whether we should expect a healthy slowdown, a mild recession or a slump in the economy. The stock markets - especially the US ones - are answering this question quite optimistically. Although the sword of Damocles of a Russian gas supply freeze continues to hang over Europe, the stock markets - where good results have been reported so far in the earnings season - nevertheless developed positively in July. In Europe, the DAX gained just under 5.5%, the Eurostoxx50 just under 7.5% and the British FTSE100 just over 3.5%. In the USA, the Dow Jones Index came to just under 7% and the S&P500 to more than 9% gains. Japan's Nikkei also posted more than 5% gains while in China the Shanghai Composite lost just over 3% and Hong Kong's Hang Seng Index lost more than 7%.

Great expectations
Both the ECB (0.50%) and the US Fed (0.75%) raised interest rates in July. The ECB set a move of 50 bp, which was higher than announced in June. It has thus joined the ranks of those central banks which, by bringing forward interest rate hikes, are implementing a more effective fight against inflation on the one hand and a hedge against recession on the other. 
The positive development on the stock markets as well as on the bond markets anticipates a mild recession or a slight weakening of the economy as well as a decline in inflation to 2% to 3% by summer 2023. The latest data have also pointed in this direction, giving a boost to optimism. This confirms our assumption that we will not experience a recession and that equities have found their bottom. However, the trend remains volatile, as these expectations must now also be met. It is important to remember that nine of the ten major US investment banks are still cautious in their forecasts.

The light at the end of the tunnel has clearly moved closer, but we have not left it yet.