Opinion

With China using interest rates again to defuse the property crisis, and the Federal Reserve making clear in Jackson Hole that it will continue to tighten, the divergence in central bank policy between the two largest economies is increasing. This is not good news for the yuan, emerging market currencies and equities.

Low-risk stocks do better in the long run than high-risk stocks. For the record, this story equates risk with movement or, in stock market jargon, volatility. In itself, this is not the correct definition of risk. The flip side of risk in the form of volatility is opportunity.

“In accordance with Article 105(1) of the Treaty, the primary objective of the ESCB shall be to maintain price stability.”

It was a huge shock. The 37.2 percent increase in German producer prices, or PPI, for July that the Statistisches Bundesamt announced last week. Not only was this the biggest price increase ever, it was also more than five percentage points higher than the consensus expected.

Moreover, this number came before reports of the 50 percent increase in German electricity prices so far in August. And so the question arises, should we be getting ready for a German inflation, or CPI, of over 10 percent?

In the last month, we have seen a sharp recovery in the stock market that most analysts (including myself) found surprising. Let us briefly go over the reasons for this boom. We see a number of them.

«Conformément à l’article 105, paragraphe 1, du traité, l’objectif principal du SEBC est de maintenir la stabilité des prix». 

The US equity market has rebounded some 15 percent from its low in June, helped by hopes of a Fed turnaround, better-than-expected corporate results and investors who were gloomy but invested.

The June low remarkably coincided with the peak in earnings expectations for 2022 and 2023. This means the entire price recovery can be attributed to higher valuations, made possible by lower interest rates. The fact that corporate earnings were better than expected, however, says more about expectations than about the underlying earnings trend.

Valuation is often not the immediate trigger for a stock market turnaround. But it is a decisive factor in the amount of upward or downward potential for the market.

Re-rating

Since its low point in mid-June, the S&P 500 Index has risen 18 per cent. Over the same period, earnings per share rose by less than 2 per cent. There has thus been a considerable re-rating of equities over the past two months.

European gas and electricity prices break records almost daily. The effect of energy on an economy is often underestimated. Almost all economic activity consists of energy, but in a different form. 

The value of a currency is based on trust. The Russian sanctions have not helped the status of Western currencies. Yet crypto currencies also have difficulty escaping Western sanctions. The digital currency issued by China’s central bank, also known as the e-yuan, is succeeding. It may gradually gain market share from the dollar.