Weekly View - Thinking about thinking
Last week’s summit between the US and Russian presidents (which took place not far from the Pictet HQ) was a possibly redundant reminder of how the current US administration’s international diplomacy policies differ from the preceding administration’s. President Biden also indicated that he will try to meet with Chinese leader Xi Jinping, even after rallying allies to unite in a firm stance toward China during his European tour. Fewer political tensions improve political visibility and help lower volatility.
In politics elsewhere, last week’s presidential elections in Iran were set against a backdrop of rising oil prices. The victor, Ebrahim Raisi’s, ultra-conservative stance could bear upon the direction that ongoing nuclear negotiations take. If sanctions against Iran remain, Iran’s oil may not come back to the market, limiting supply at a time when demand has recovered to pre-covid levels. We are positive commodities and pricing-power companies. Marine Le Pen’s far right party gained less ground than expected in regional elections over the weekend, which were a test for President Macron ahead of France’s upcoming presidential elections.
The Federal Reserve rocked markets last week, when the expectation for two interest rate rises in 2023 was revealed in the Fed ‘dot plot’. US central bankers acknowledged the strength of the US economy and its robust labour market, predicting interest rate rises in 2023 instead of 2024 as previously. The Fed also raised the interest rate on excess reserves and reverse repos to help large banks and money market funds to generate some modest income on their cash. Two- and five-year Treasuries sold off immediately following and we saw curve flattening on market participants’ belief that the Fed will act earlier. We are short duration, still believing that the Fed will be patient and that what we saw last week was a bit of profit taking by markets. Increased US sovereign yields were echoed by their European counterparts. In spite of this, yields on Greek five-year bonds fell into negative territory for the first time. Equity markets remain relatively calm as the Fed’s decision removes a short-term uncertainty in the market and paves the way for a potential tapering announcement at its Jackson Hole gathering later this summer. The Fed is now considering tapering.