To The Moon

Jerome Powell, the chairman of the Federal Reserve, told basically no news at the annual meeting in Jackson Hole. The only difference was that this time he needed few words and could therefore be quite direct. As a result, the Federal Reserve's message finally landed on the financial markets. The message is still the same: the fight against high inflation must be won at all costs. In recent months, the market has speculated on a possible turn by the central bank in the coming months, but the illusion that interest rates would be lowered again next year has been dispelled by Powell's speech. Price stability is the basis for a healthy economy and therefore also for financial markets.

Investors can count on the US central bank to continue to raise interest rates until inflation is under control. Powell specifically pointed out the risk of letting go of the reins too soon. Given the underlying level of inflation, the Fed's policy rate will have to rise even further than the market has expected until recently. Ultimately, economic pain in the form of a recession is inevitable. However, a recession in the United States still seems to be something for the second half of next year at the earliest. Higher policy rates will also push up capital market rates, but ultimately the bond market will benefit from the fight against inflation. The gap between high inflation and comparatively low-interest rates is still so large that bonds are not attractively valued. Shareholders focus less on inflation and more on the consequences of rising inflation for interest rates. Higher interest rates depress not only economic growth, but also the valuation of the stock market. Growth shares, which have recently risen, are particularly vulnerable. The difference in valuation between growth and value shares is still historically large, but that gap will narrow.

In Europe, there are rumours that the ECB will raise interest rates by 0.75%, but in view of the recent sharp rise in energy prices, a rise in interest rates in Europe is no longer necessary to cause a recession. Energy prices are now so high that they are in themselves a guarantee of a solid recession. Because high inflation is almost entirely caused by rising energy prices, the ECB's influence on this is very limited. The ECB can print money, but it cannot produce gas or electricity. It is mainly geopolitical factors that determine inflation in Europe. There is even a risk that high energy prices combined with higher interest rates will cause permanent capital destruction. For energy-intensive companies, in particular, there seems to be no future in Europe. Think for example of food (heated greenhouses), pulp and paper, the chemical industry, refineries, iron and steel, other metals like zinc and aluminium and also cement. Because of this development, there is ultimately little chance that the ECB will raise interest rates much further. As a result, European equities are attractively valued, but unfortunately, there are still risks that may not be fully factored in. For example, there are elections in Italy on 25 September and the right-wing coalition is likely to win an absolute majority. The right-wing coalition has already indicated that the hundreds of billions from the European Corona Recovery Plan must now be used to reduce the energy bills of the Italians. Brussels cannot and must not agree to this, which could boost the euro-sceptical attitude of the incoming Italian government. A combination of a severe recession in the eurozone, the growing refugee problem, sharply rising energy prices and a new political crisis will not only cause a lot of social unrest but possibly also another euro crisis.

Unfortunately, things are not much better in Asia. As in other parts of the world, extreme weather conditions are weighing on the economy. In China, interest rates have already been cut twice this month and measures are being taken to stabilise the property market. In Japan, the number of corona attacks has risen to a new record and in China, too, whole cities are still being shut down because of the corona. Furthermore, it has never happened before that so many high-ranking American politicians have visited Taiwan in such a short space of time. The big difference, however, is that Asia is not plagued by inflation and therefore has time and space to stimulate the economy. This stimulating policy, combined with an extra credit impulse, has traditionally been a boost to Asian markets, although they will not be immune to developments in the European and US economies. At the same time, China has become more important to the global economy and in that context, important issues will be discussed at the upcoming Communist Party congress, including the fight against corona and the development of the Chinese housing market.

The message of the western central bankers regarding the fight against inflation is clear. There is no point in fighting the central bank. As a result, there are market segments that look vulnerable, but at the same time, this development also creates new opportunities. The most beautiful flowers grow in the valley. As a result of the price decreases that actually started at the beginning of last year, more and more segments - both on the bond market and on the stock market - have become more attractively valued. In many cases, it can even be assumed that the bottom has now been reached, but as long as central banks tend to raise interest rates further than the market currently expects, the recovery potential is limited.