Market update September

Along with the high energy costs, a sharp downturn in the global economy is on the horizon.

A turnaround in monetary policy is not anticipated in the near future, and this realisation put an end to the summer rebound on the equity markets. However, it really should not come as a major surprise to anyone.

First, inflation rates remain near peak levels. Second, Fed officials have regularly stepped in to correct excessively optimistic market expectations. Third, the labour markets – which are an important indicator of economic conditions – still look robust. And finally, the equity markets are holding up relatively well, despite all of the difficulties. Thus, from the perspective of the monetary authorities, there is no reason to deviate from the path of monetary policy tightening.

Moreover, another factor for the ECB is the sharp depreciation of the euro, which is generating additional inflationary pressure. As a result, the possibility of interest rate hikes of three quarters of a percentage point is even being considered in Europe, which would have been unthinkable just a few short months ago.

Hence, the markets have to get used to the idea that – in contrast to recent years – the central banks are not going to come rushing in to help when the going gets rough. In this cycle, it is going to take longer before there is a change of direction in monetary policy. At the same time, a number of leading economic indicators are dropping precipitously.

In conjunction with the high energy costs, there are prospects for a sharp downturn in global economic activity, which will lead to a recession in some areas. Bearing this in mind, it is only a matter of time before corporate earnings start to decline.

Looking to the immediate future, the factors affecting the equity markets thus clearly indicate that a defensive orientation is appropriate. Consequently, the underweight positions in the mixed funds are maintained at the previous levels. Furthermore, the weighting of euro bonds is reduced. Short-dated USD bonds und commodities are being purchased.