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The significant decline in the US inflation rate in October has surprised the markets positively and brought price gains for both equities and bonds. Hopes are already spreading that the US Federal Reserve could move to raise the key interest rate less sharply than originally expected at its next meetings if price pressures do indeed ease further in the coming months. The reaction of the markets has clearly shown who are the winners and who are the losers of a less tight interest rate policy by the Fed: On the equity side, valuation-sensitive segments such as technology and growth stocks, which previously suffered particularly badly from the restrictive monetary policy, are clearly at an advantage. On the bond side, bonds with long residual maturities are benefiting disproportionately from an incipient easing in the inflation trend. The clear loser, on the other hand, is the US dollar. In recent months, the Fed's interest rate hikes, which were very significant by international standards, have led to a strong overvaluation, so that even the expectation of a less aggressive interest rate policy has triggered noticeable price losses.
European equities have been the clear outperformers in recent weeks. Very low valuation levels have recently attracted "bargain hunters". In addition, the probability is increasing that the ECB will have to end its monetary tightening course much earlier than expected due to weak economic data. The noticeable decline in gas prices is also benefiting European companies. If China also eases its zero-covid policy and thus the economy picks up again, this would additionally benefit the export-oriented industry in Europe. Despite the many positive signals, professional investors should not assume that the recent strong performance will simply continue. The issue of secure energy supply will continue to preoccupy the economy next year, as Russian gas will no longer be available in 2023.
Fundamentally, the global fundamental environment remains weak. Inflationary pressures should therefore continue to ease in the short to medium term, also due to statistical base effects. However, this alone is not enough for a trend reversal on the markets. After all, it should not be overlooked that global corporate profits are still in a downward cycle. Further earnings disappointments can be expected by early 2023 at the latest, when the reporting season for the past quarter begins. Therefore, professional investors should weight defensive equity segments prominently in asset allocation.
Member of the Management Board
Head of Press & Communications
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