The (temporary) return of volatility
Market update by Karin Kunrath, Chief Investment Officer of Raiffeisen KAG
At the macro level, the tenacity of inflation as a result of the robustness of the US economy is causing expectations of fewer and/or later interest rate cuts by the Fed. At the micro level, the earnings growth trend that is expected on the equity market for 2024 has already been priced in to a high degree, especially for the major tech names, raising the bar even higher for positive surprises in the current reporting season.
On the geopolitical front, the looming risk of war not only popped back up on the radar with the further escalation in the Middle East conflict surrounding Israel, but could also rapidly darken the prospects for the global economy through the vector of a temporary oil shock as a result of extensive fighting in the region.
In the capital market, the diminishing prospects of (US) interest rate cuts in the near future were reflected in metrics such as US Treasury yields hitting their highs for the year. Profits were taken increasingly on the tech shares that had enjoyed rapid price increases, which caused bitter losses for smaller names in particular.
In the context of the geopolitical situation, risk premiums for the crude oil and gold price, for the US dollar, and on the equity market rose in recent weeks after a longer phase of remarkable financial market resilience. A flight into the “safe havens” of the highest-quality government bonds for fear of a sudden economic downturn, for example as a result of a crisis-driven surge in the oil price, did not come to pass, however.
Our market assessment criteria are still painting a solid overall picture. The “wall of worry” and thus the risk of elevated market volatility remains, however, especially due to the risk factors from monetary policy and geopolitics.
Overview of asset classes
Government bonds: yields rose sharply
Government bond yields moved up since the start of the year. In Europe, the real German yields drove up the nominal German yields significantly in April; the inflation expectations that were priced in already started to decrease in the middle of April. Inflation data and the reaction of the central banks remain the dominant topics. An interest rate cut is not priced in in the USA until September, but in June in Europe – an atypical order of moves that is supported by the current conditions, however.
Corporate bonds: extremely low spread levels becoming more realistic
If the steep decline in EUR investment grade corporate bond spreads that has been seen since autumn 2023 continues, the extremely low spread levels from the middle of 2021 are definitely a realistic target in late summer. The spread rally is currently being supported by good economic data, the willingness of the ECB to cut interest rates, and the utter lack of attention that is being paid to geopolitical risk factors.
Emerging Market bonds relatively attractive with economic momentum
Emerging Market bond spreads recently enjoyed a rally, like other spread assets, but still feature more attractive valuations than other high yield assets in our view. We see relative attractiveness and positive, consistent economic dynamics in these regions.
Developed equity markets profiting from positive conditions
The international stock markets saw a slight consolidation over the past weeks. While the equity markets have been able to profit from a good earnings season to date, the higher bond yields have generated some headwinds. The somewhat overheated sentiment has abated in recent weeks.
Emerging equity markets: shares from China enjoyed strong growth
Especially Chinese equities are currently enjoying a very good phase, and have posted strong gains despite the global trend. The positioning of international investors had fallen to a very low level at the end of January, and the price reaction was pointing to capitulation. We expect a continued positive trend, though considerable temporary setbacks will likely be seen from time to time.
Commodities markets: precious metals segment remains strong
Industrial metals were somewhat firmer in recent weeks. Despite continued geopolitical uncertainty, the energy segment saw slight price losses. Precious metals remained very strong in light of the further increase in bond yields.