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Despite the slight easing in equity markets, the overarching investment environment remains fragile and risky. New corona lockdowns loom in China, an energy crisis is increasingly likely in Europe, purchasing power is suffering from inflation and global monetary tightening is increasingly coming through in the "hard" macro data.
Global equity markets are in an overarching negative trend with an almost picture-perfect trend erosion: positive counter-movements cannot compensate for previous losses. So far this year, the markets have systematically seen lower lows and lower intermediate highs. With such trend patterns, further losses are more likely than a sustained stabilisation or countermovement.
In the optimistic, but rather unlikely scenario, the central banks manage to sustainably curb inflation and at the same time ensure a "soft landing" of the global economy. Corporate profits stabilise and the tight monetary policy is moderately eased. In this scenario, the current price levels in both equity and bond markets would offer an attractive buying opportunity.
However, a "normal" recession is much more plausible, as the real economy is already noticeably slowed down by monetary tightening. The inflation forecasts do not permit any easing. In this scenario, a turnaround on the markets is unlikely in the near future; at least another wave of selling off would have to be expected.
In a worst-case scenario, a severe global recession could even loom, caused by strong economic imbalances. Triggers could be global corporate and sovereign debt or the inflated Chinese real estate market. In this scenario, the negative trend on the stock markets would continue at least until the end of the year.
The US Federal Reserve gives high priority to fighting inflation. With its rigorous tightening course, it is driving the rapid appreciation of the dollar. However, the strong US currency is also a symptom of the crisis-ridden global economy and increased geopolitical uncertainty. In such times, the dollar is in demand as a safe haven. However, its strength is becoming a strong risk factor for global stock markets. This is because these are dominated by multinational US companies that generate a large part of their revenues abroad and are therefore sensitively affected by the appreciation. Moreover, the US dollar is the world's most important debt currency, and the current development increases the burden on local debtors in their respective currencies.
In the short to medium term, the US dollar should remain strong. In the long term, however, it should show weakness again due to the clear overvaluation. Against this background, global investors with high dollar exposure should be more agile in their currency management.
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