Light at the end of the tunnel?

Since mid-June, both the equity markets and the bond markets have performed well. In view of increasing fears of an approaching recession, this development in bonds is easily explainable. The prospect of interest rate increases that are not so drastic after all has led to a positive price development on the bond markets. Surprising, however, are the gains in equities. What happened?

The easing is accompanied by falling crude oil prices. The general crude oil benchmark WTI (Western Texas Intermediate) recorded its last high on 14 June at around USD 122 and was quoted at around USD 90 on 16 August. As high as before the start of the war in Ukraine. This development can now be interpreted in two ways. Firstly, as a clear easing on the inflation front. After all, there were fears that the price of crude oil could rise to 150 USD. Secondly, as a cooling of demand or of the economy in general. Here the question is whether we should expect a healthy slowdown, a mild recession or a collapse of the economy. The stock markets - especially the US ones - answer this question quite optimistically. The sword of Damocles of a Russian gas supply freeze continues to hang over Europe.The easing is accompanied by falling crude oil prices. The general crude oil benchmark WTI (Western Texas Intermediate) recorded its last high on 14 June at around USD 122 and was quoted at around USD 90 on 16 August. As high as before the start of the war in Ukraine. This development can now be interpreted in two ways. Firstly, as a clear easing on the inflation front. After all, there were fears that the price of crude oil could rise to 150 USD. Secondly, as a cooling of demand or of the economy in general. Here the question is whether we should expect a healthy slowdown, a mild recession or a collapse of the economy. The stock markets - especially the US ones - answer this question quite optimistically. The sword of Damocles of a Russian gas supply freeze continues to hang over Europe.
 
In this environment, the stock markets - where good results have been reported so far in the earnings season - have developed positively in July. In Europe, the DAX gained just under 5.5%. The Eurostoxx50 gained just under 7.5% and the British FTSE100 just over 3.5%. In the USA, the Dow Jones Index gained just under 7% and the S&P500 more than 9%. Japan's Nikkei also gained more than 5%, while in China the Shanghai Composite lost just over 3% and Hong Kong's Hang Seng Index more than 7%.

The ECB (0.50%) as well as the US Fed (0.75%) raised interest rates in July. The ECB took a step of 50 bp, which was higher than announced in June. It has thus joined the ranks of those central banks that, by bringing forward interest rate hikes, are implementing a more effective fight against inflation on the one hand and a hedge against recession on the other.The ECB (0.50%) as well as the US Fed (0.75%) raised interest rates in July. The ECB took a step of 50 bp, which was higher than announced in June. It has thus joined the ranks of those central banks that, by bringing forward interest rate hikes, are implementing a more effective fight against inflation on the one hand and a hedge against recession on the other.
 
The positive development on the stock markets as well as on the bond markets anticipates a mild recession or a slight weakening of the economy as well as a decline in inflation to 2% to 3% by summer 2023. The latest data have also pointed in this direction, giving a boost to optimism. This confirms our assumption that we do not see a recession and that equities have found their bottom. However, the trend remains volatile, as these expectations must now also be met. One must not forget, nine of the ten major US investment banks are still cautious in their forecasts.
 
The light at the end of the tunnel has clearly moved closer, but we have not left it yet.