Review & outlook

July 2023

The US Federal Reserve has raised benchmark interest rates by 5% since spring 2022 and the market is now expecting US interest rates to rise by a further half a percent over the course of the year. Although inflation rates have been on a steady downward trajectory since August 2022, they are still well above the Federal Reserve’s target of 2%. Rising interest rates are supposed to dampen economic growth, thereby countering inflationary pressures. The problem, however, is that there is always a lag of 12 to 18 months before this effect materialises and so the extent of the desired dampening effect on the economy is not yet foreseeable. We experienced the first side-effects of the massive rise in interest rates back in the spring when several US banks suddenly exhibited liquidity problems and had to be rescued by the central bank, with the side-effects then culminating in the demise of Credit Suisse. Since then, though, interest rates have continued to climb worldwide and, as communicated by the central banks, are set to rise further over the near term. The massive loans on commercial real estate are a particular risk to banks at present.

The economic data published over the past few months were surprisingly robust and stand in stark contrast to the negative expectations of most economic analysts. Probably the most important indicator is the US labour market, which is now weakening considerably despite all the glossing-over of the issue by central banks and politicians. In combination with further interest rate rises and even higher levels of debt, this is likely to have a negative impact on financial market sentiment over the coming months.

In a normal economic environment, long-term interest rates are always far higher than short-term rates. But interest rates on 10-year US Treasury bonds currently stand at 4%, as opposed to the 5% on 2-year bonds, a phenomenon experts refer to as an ‘inverted yield curve’. Such scenarios have occurred six times since 1981, leading to an economic slump in all cases bar none.

The war in eastern Europe is still far from being resolved and China’s faltering economic recovery, in combination with an escalating trade war with the US and quarrels over Taiwanese independence, is also not helping to improve sentiment around the globe. In this severe environment, financial markets have so far remained in surprisingly encouraging form, as investors have mostly expected the cycle of interest rate rises to end soon. However, central banks would now have us believe that the so-far surprisingly robust economic data could also withstand further interest rate moves to tackle inflation without suffering any negative effects at all. This is also the main reason why the gold price has dropped back slightly since hitting all-time highs in April.

However, we expect to hear a much more negative tone from the business sector over the coming months and central banks to then be forced to rethink their aggressive interest rate policy.

We are convinced of the quality of our broadly diversified investments and continue to hold our strongly overweight positions in precious metals. Moreover, our option strategies mitigate the risk in the event of unexpected market fluctuations.

We would like to thank you for your trust and wish you many more beautiful summer days to come.

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