Current market commentary
While analysts were once again too pessimistic and the Q1 reporting season is developing better than expected, the turbulence at regional banks in the US is not abating. The latest interest rate hikes by the central banks are unlikely to improve the situation - on the contrary, the likelihood of a credit crunch in the coming months has thus increased once again. This, coupled with likely declining liquidity (US debt ceiling, quantitative tightening) and rising US unemployment in the coming months, should significantly limit the potential for risk assets. As equity valuations, especially in the US, are also not attracting bargain hunters and systematic strategies are now being invested in more heavily again, which increases the drop rate of equities, we reduced our equity allocation last week from a small to a moderate underweight. Given the diversity of risks and the low risk premiums, we feel comfortable with our more cautious, broadly diversified allocation.
The Q1 reporting season is coming to an end in the next two weeks. The bulk of companies will have reported and corporate share buyback programmes will be in full swing again. The Bank of England (BoE) meets on 11 May and Turkey’s elections take place on 14 May. On Tuesday, Chinese imports (Apr) will be released and should provide further insight into the economic recovery. On Wednesday, industrial production data (Mar) for Italy and inflation data (Apr) for the US will be released. Chinese inflation data (Apr) and US producer prices (Apr) follow on Thursday. The week ends with UK Q1 economic growth and US consumer confidence (University of Michigan, May). The following week will see the ZEW index (May), German producer prices (Apr), US retail sales (Apr) and US housing data (Apr).
If unemployment rises from its cycle low, US equities should fall
- In April, US unemployment fell to its lowest level of the cycle. A rise in unemployment of more than one percentage point from the cycle low has usually been accompanied by an economic downturn, falling corporate profits and falling equities.
- A factor that is then likely to put additional pressure on the equity markets is the increased importance of the US re-
tirement market. If unemployment rises significantly, the support from the monthly inflows into these investment strategies will fall as fewer people save.