Equity markets ignore economic risks

At a glance

Economics

• Bank turmoil triggers mild credit crunch and sends US economy into mild recession. Recovery in 2024.
• Europe has mastered the winter without a gas shortage. New upswing from summer. Inflation slowly declining.
• Central banks: Bank turmoil leads to lower interest rate peak. US Fed cuts rates from end of 2023, ECB rates remain high.

Equities

• Equity markets rise despite banking and recession worries. Defensive and growth stocks ahead of value and cyclicals.
• Economic challenges and monetary policy increase the likelihood of negative summer seasonality.
• Underweight appropriate with less attractive risk-reward profile. Relative potential in emerging market equities.

Bonds

• Yields on safe government bonds fall in the face of banking and economic worries. Ten-year treasuries yield below 3.5%.
• Financial bonds suffer from bank worries. Sharp rise in risk premiums. Emerging-market local currency bonds preferred.
• We remain slightly underweight in bonds. Investment-grade corporate bonds and emerging-market bonds preferred.

Commodities

• Gold a big beneficiary of banking sector worries. Gold and silver with potential on Fed reversal.
• Structural oil shortage widened by OPEC cuts. US driving season brings seasonal tailwind to oil.
• Industrial metals suffer from economic worries. Potential in the medium term with a stronger Chinese recovery.

Currencies

• Interrupted by the turbulence in the banking sector, the euro is now continuing its upward trend.
• The euro consolidates its position against the pound above the 0.85 pound per euro mark.
• Hardly any movement in the EUR/CHF currency pair. The upward potential for the euro remains limited.