Hopes that central banks will slow down in the face of a recession have evaporated this week – bad news for capital markets and for vulnerable companies like Credit Suisse.
Christine Lagarde, President of the European Central Bank, is sticking to the monetary tightening course.
Investors who had been looking forward to a conciliatory end of the year on the stock exchanges or even a revival of the bear market rally were badly disappointed this week. Within a few hours, the mood on the markets turned from cautiously optimistic to soberingly pessimistic.
The rate hikes announced by the central banks were in line with expectations. However, neither the American and European Central Banks (Fed, ECB) nor the Swiss National Bank (SNB) announced an end to the rate hikes.
The fact that hopes of a flattening or falling key interest rate level being pushed further into the future is poisoning the stock markets. Because professional investors refer to the expected level of interest rates to determine the current price of shares. The leading Swiss index SMI lost 2.5 percent on Thursday, the German DAX and the technology-heavy US index Nasdaq even more than 3.3 percent.
The downward movement weakened on Friday, but the negative pressure on the prices clearly remained. Lesson of the week: As long as inflation stubbornly remains well above the 2% target central banks will not deviate from their hard stance; and that is standing in the way of a sustained recovery in stock markets.
A long way
It even seemed as if the currency watchdogs wanted to outdo each other with the harshness of their discourses. But it wasn’t Fed Chair Jerome Powell who gave the sharpest monetary policy hawk on Wednesday, but ECB President Christine Lagarde on Thursday.
As expected, the ECB raised the key interest rate by 0.5 percentage points to 2 percent. The interest rate step was thus reduced compared to the last increase. However, Lagarde made it clear that the time for a march stop had not yet come. Therefore, interest rates in the euro zone would continue to rise “constantly and significantly”. This means that further monthly interest rate hikes should be in place by March.
In view of inflation, which is “at a level that is far too high”, everything must be done to bring it back down to the target range of 2 percent, according to Lagarde’s discourse. The inflation rate in the euro zone was 10 percent in November, which is only a small decrease compared to the previous month (10.6 percent). The message is therefore extremely aggressive, although the rate hike is smaller. In addition, from March the ECB intends to reduce its balance sheet by reducing its large bond holdings, which is putting additional pressure on the bond markets.
As expected, the Fed also raised the key interest rate in the United States by half a percentage point to the target range of 4.25 to 4.5 percent. But this came after four major interest rate hikes of 0.75 percentage points each, which left the first signs of the brakes on the US economy.
The American economy is well ahead of the euro zone in the process of normalizing monetary policy. First of all, it will be relevant for American stocks when the Fed eases the interest rate regime again. That this could be the case as early as next year currently seems rather unlikely.
imminent cooldown
The SNB also made the third rate hike of the year this week and also raised the key interest rate by 0.5 percentage points. It has risen within six months from -0.75 percent in the summer to 1 percent now. Even if inflation in Switzerland has fallen slightly to 3 percent and is at a much lower level than in the euro zone, it is “too early to give the all-clear” for SNB President Thomas Jordan. Underlying inflationary pressures have risen again. Therefore, it cannot be ruled out that further increases will also be necessary in Switzerland.
Philipp Burckhardt, bond strategist at Lombard Odier, expects another final rate hike of 25 basis points at the beginning of 2023. This assumption could be adjusted downwards should the environment cool down further. After that it looks.
According to the economic researchers at ETH Zurich (KOF), the Swiss economy will slow down significantly in the coming year. From the current 2 percent growth, only 0.7 percent is expected for 2023. In the following year, economic growth is expected to recover. An increase in unemployment is not expected. A further rate hike in the spring would therefore be entirely justifiable.
Hopes that central banks would slow down as recession loomed have evaporated this week. This is bad news for growth and technology stocks, which are particularly interest rate-sensitive because their valuation is heavily weighted toward future earnings. Over the course of the week, stocks such as Netflix, Tesla and Apple or in Switzerland Sonova and Logitech had to post significant losses. But even companies like Credit Suisse (CS), which are struggling financially, are struggling in an environment where funding costs continue to rise.
CS: no relaxation in sight
After the successful completion of the capital increase last week, things initially seemed to be easing for the big bank. The price of the CS shares was able to stabilize and at times even increase after the sale before and during the capital measure.
Price has held up relatively well in the context of the current declines, but all gains have given back since the corporate action was completed. It didn’t help that Thomas Jordan recently described the realignment of CS as “encouraging” from the point of view of financial stability and the outgoing Minister of Finance Ueli Maurer also tried to back the bank on Swiss television and expressed the opinion that CS was “the will create curve».
Meanwhile, the bad news doesn’t stop there. At the beginning of the week it was announced that the country heads for China and Italy were leaving the bank. The head of communications also resigned after less than a year. According to the most recent statement by the Chairman of the Board of Directors, Axel Lehmann, the outflow of customer funds has been stopped. In the current market environment, however, there is no sign of a trend reversal in investment banking, which is still making losses.