Equity markets are due for a reset

In our biweekly publication ‘Monitor' provides you with a structured overview of current capital market developments.

Current market commentary

Bad economic data, good economic data, rising interest rates, falling interest rates, a Fed that has recently become more hawkish again - none of this seems to affect US tech stocks in particular. Since the beginning of the year, the Nasdaq is now up almost 40%, driven by a P/E valuation expansion of 30% - and with interest rates almost unchanged since the beginning of the year. Hopes for a soft landing in the US as well as AI euphoria have definitely supported this. In the short term, however, the probability of a countermovement is now increasing. In addition to declining liquidity, there should be more rebalancing flows towards the end of the quarter. Equities have significantly outperformed bonds since the beginning of the quarter and this month. Strategies that work with target ratios need to reduce the outperforming equities at the expense of bonds. Moreover, large option expirations in the past have often marked turning points in markets due to hedging adjustments (e.g. unwinding delta hedges). Last Friday was such a day.

Short-term outlook

After the Fed and ECB last week, it is the Bank of England's turn to decide on interest rates this week (22 June). The market expects a rate hike of 25bp. Fed Chair Powell will also address the House of Representatives and the Senate on 21/22 June. From 26 to 28 June, the ECB will host the Forum on Central Banking in Sintra. On 29/30 June, EU leaders meet in Brussels. US housing data (May) will be released on Tuesday, UK inflation data (May) on Wednesday and French business sentiment (Insee, Jun.) on Thursday. Japanese inflation (May) and preliminary purchasing managers' indices (Jun.) for Europe and the US will follow on Friday. In the following week, preliminary inflation figures (Jun.), consumer confidence (Jun.), the ifo index (Jun.), retail sales (Jun.) and labour market data (Jun.) are due for Germany. In the US, consumer confidence (Jun.), Chicago PMI (Jun.) and private household data (May) will be released.

Equity markets are due for a reset

Source: Bloomberg, Time period: 01/01/1950 – 16/06/2023
  • The stock markets are moving upwards without major fluctuations. For 70 trading days (9 March), the S&P 500 has not seen a setback greater than 3%.
  • Historically on average, however, such a correction occurs about once a month - on median almost every fortnight. So, statistically speaking, it is time for the next setback.
  • But there are also good fundamental reasons, such as increased valuations with higher interest rates, falling liquidi-ty, and rebalancing flows.