The Market At a Glance: Push it to the limit
You know we love songs that pump you up. The month’s pick was popularized when the movie Scarface was released in 1983, and you find in it all the electronic sounds and rhymes of the 80s. “Push It to the Limit” by Paul Engemann can turn you into a Duracell rabbit in an instant. You may wonder why we picked this song. After all, financial markets were rather quiet in April. The price of most assets, from equity to bonds to commodities, didn’t move much. Well, when you look at what is happening in the background, it is a different story. And the lyrics of the song are quite evocative: many limits are being pushed.
So, what kind of “razor’s edges”, “tops”, “limits”, “points of no return” are we talking about?
First, the gap between what investors think central banks will do and what central bankers tell us they are doing is widening. While it is expected that rates will go higher in May, pushing economies further in their retrenchments, market participants are betting that the Federal Reserve (which is the central bank that has risen rates the most aggressively), will stop after that and will even cut rates by 2% from the current level by the beginning of the year. Divergences of opinions usually don’t end well. For now, it is a bit too soon to tell who is right. Especially after the conflicting economic data points that were released recently. On the one hand, the inflation’s measure most scrutinized by the US central bank came in hotter, suggesting that the fight against higher prices is not over. On the other hand, the GDP number, which gives the pulse of the economy, came in weaker, suggesting that the economy is cooling down.
Second, U.S. debt continues to venture into uncharted territory. Debates on the debt ceiling are raging as the U.S. government again reached the maximum amount allowed to borrow to meet its obligations. As a reminder, the U.S. government can borrow money to pay its bills when its spending exceeds its revenues, and it never really restrained itself from doing so in the past few decades. To increase the debt limit, the government needs Congressional approval, and a nerve-wracking process starts. If the request is not approved in time, it could have disastrous consequences. In 100 years of history, Congress was always able to agree on a suspension or an increase of the ceiling. But the underlying challenge remains: is that amount sustainable, especially now that the cost of servicing it has dramatically increased?
Third, companies have started reporting their financial results for the past quarter. It seems there is also a limit here in terms of how well businesses can perform in a challenging economic environment. So far, the results are mixed and similar to what we observed in the previous quarter. Higher rates have also pushed some banks on the edge.
Fourth, the global geopolitical landscape is becoming more tense. Tectonic shifts between economic blocs are ongoing. De-dollarization is becoming a prominent theme. US-China relations are on a dangerous path.
Limits often exist to be pushed and when this happens, it often creates opportunities for investors. But there are some points of no return that shouldn’t be crossed. That’s why on our side, we remain prudent with the management of our portfolios.
De-dollarization. That’s a topic gaining traction in discussions if we believe Google trends. What is it, and what does it mean? Let us explain.
The U.S. dollar plays a central role in global trade, financial markets, and monetary systems. It is much more than just the currency of the United States. It is being used as a reserve currency by central banks (for example, 38% of the Swiss National Bank reserves are USD), as a way for foreign governments and companies to raise money, and as a reference currency for invoices. Some countries have even pegged their own currencies to the USD.
In a context of geopolitical tensions, many countries are seeking to reduce their reliance on the U.S. dollar. That’s what de-dollarization is about. For example, Saudi Arabia is in active talks with Beijing to price some of its oil sales to the Chinese yuan instead of USD.
While "De-dollarization" is possible and has begun to some extent already, it won't happen overnight for sure. The chart below explains why.
Let’s talk wealth
In an environment where inflation is significantly eroding consumers' purchasing power, the increase in interest rates on your savings is a welcome ray of sunshine.
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We are pleased to announce that we are increasing the interest rate on Swiss franc deposits at Alpian to 1.0% with immediate effect.
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0.5%: Between 0 and 100,000 CHF
1%: Between 100'001.- and 250'000.- CHF
Finally, it is important to note that the security of your deposits at Alpian is given the utmost attention and care. This is why your Swiss franc deposits at Alpian are kept at the Swiss National Bank.
Have a great month of May!