Private Banking

Monthly market review: what's new in the financial markets?

Thierry Masset, Chief Investment Officer reviews the economic and financial news. Every month, he analyses events that have impacted the financial markets. The context of any potential stock market fluctuations is equally scrutinized.

Editorial

     

  • As the signs of a flight to quality due to growth concerns are clearly visible in a strengthening dollar, that may push stock investors to adopt a more defensive stance. They are expected to favor “value” stocks (mainly Energy and Financials) and more “defensive” companies (such as Utilities or Healthcare).
  • As they offer a better hedge against rising inflation expectations, commodities and commodity companies should continue their run higher.
  • Negative yields have vanished from the world’s corporate bond market as investors brace for monetary tightening. The Bloomberg global corporate bond index is now yielding about 3.7%, its highest since March 2020, jumping from 1.3% at the end of 2020. The return of positive yields is good news for anyone that is buying a bond and plans to hold it to maturity.

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Financial Markets & Investment Strategy

EQUITIES

In search for inflation and volatility protection

As the signs of a flight to quality due to growth concerns are clearly visible in a strengthening dollar, that may push investors to adopt a more defensive stance. They are expected to favor companies with more stability and more predictability in earnings. Those include low duration stocks, such as value stocks (mainly Energy and Financials) which perform better than growth stocks (+19% year-to-date, in euro) during rising inflation expectations and higher interest rates. And also more “defensive” companies (such as Utilities or Healthcare) which, thanks to their lower sensitivity to economic conditions, pricing power, high dividend income or low volatility, have outperformed more cyclical stocks by almost 17% (in euro) since the beginning of the year.

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BONDS

Negative yields are now extinct in the world of corporate bonds

Negative yields have vanished from the world’s corporate bond market as investors brace for monetary tightening. Every single note in a Bloomberg index tracking the global investment-grade corporate bond market yield 0% or more. It is a dramatic turnaround from August, when more than $1.5 trillion of debt, most of it in Europe, came with a sub-zero yield. It marks the end of an era fueled by easy money and extraordinary central-bank policy meant to hold down borrowing costs and stimulate inflation. That was sparked by a combination of the financial crisis and the European debt crisis, followed by the outbreak of the pandemic. Now it is all going in reverse. Bond yields are soaring around the world and investors are worried that inflation is getting out of control. The Bloomberg global corporate bond index is now yielding about 3.7%, its highest since March 2020, jumping from 1.3% at the end of 2020.

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OTHER ASSET CLASSES

The U.S. dollar is the darling of investors

It is a perfect storm in favor of the dollar. The greenback strengthened versus all of its major peers as China’s Covid lockdowns, accelerating inflation and the worsening outlook for global growth boosted demand for the currency as a haven. The dollar’s rally, even in the face of surging U.S. inflation, a shaky stock market and speculation that rate hikes could set off a recession, seems to track the “dollar smile” theory. That model predicts that the dollar will advance under two opposing scenarios: when risk aversion fuels demand for the safest assets, or when U.S. growth outperforms the rest of the world. It is the haven side of the equation that is driving it now! Markets are worried and looking for safe havens. Last month, the U.S. dollar has advanced against all of its major counterparts, most notably the yen, which hit a 20-year low against the greenback. A Bloomberg gauge of the greenback pushed through to the strongest level since 2002 and recorded its biggest yearly gain (+8%) since 2010 versus a basket of 10 major currencies. 

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