Swiss National Bank Clears the Way for Rate Cuts

The central banks of Switzerland and Japan made diametrically opposed decisions on interest rates, but both with the intention of influencing their currencies. The Swiss franc has risen by more than 15% since the end of 2019 and exports have failed to return to pre-crisis levels. As a result, the Swiss National Bank opted to beat market expectations by cutting interest rates by 25 basis points, a move designed to ease pressure on the franc. The Bank of Japan, on the other hand, finally moved away from its negative rate regime by raising rates to the 0/0.10% bracket and exiting its yield curve control mechanism. Just when the annual Shinto negotiations had resulted in wage hikes of more than 5%, the aim was to stop the yen's fall and curb import inflation.

The rise in US immigration has undoubtedly contributed to this miraculous disinflation by easing labour market tensions, along with a pick-up in productivity. As a result, the Fed has more flexibility than the ECB. The eurozone is not in a position to anticipate Fed rate cuts as it would risk weakening the euro and boosting imported inflation, especially as energy is trending upwards again. Brent crude is already above $85. The LTRO/TLTRO programmes have ended, but the ECB is expected to accelerate its balance sheet reduction in July.

Even though, despite the prospect of real interest rates remaining high for a few more months, this week's economic data showed that growth is holding up. PMIs point to a possible pick-up in activity in the euro zone, although German manufacturing remains in crisis. In the US, PMIs remain in expansionary territory and the Fed's regional indicators tend to support the soft landing scenario.

Equity markets have performed very well since the end of October, so we believe the time has come for tactical profit taking. The environment is propitious for market consolidation: equity risk premiums leave no room for disappointment in the face of consensus expectations of a miraculous disinflation. In the short term, end-of-quarter portfolio adjustments will lead to profit-taking and a shift towards fixed income. At the same time, the implied correlation with the S&P 500 is now at its lowest level in 10 years. In our view, fixed income markets now offer a more attractive risk/return profile. In particular, we have strengthened our duration in the US.

European markets

Upbeat economic indicators drove European markets higher. Cyclical sectors, especially real estate and banking, led the gains. The composite PMI came in at 49.9, above expectations of 49.7, and the services sector remained in expansionary territory above 50 for the second month in a row. Only the manufacturing sector remained subdued. The ZEW German investor confidence index rebounded strongly in March, rising for the eighth consecutive month.

The first sign of central bank easing came from Switzerland, which cut rates by 25 basis points. The Bank of England, however, left rates unchanged, even though no committee member voted for a hike. The ECB's Christine Lagarde said the bank would not embark on a path of lowering rates after a first cut. The situation has changed, but the tone remains cautious.

Regarding corporate news, Kering issued a profit downgrade warning, the first cloud to appear in a sector that had enjoyed a fairly upbeat earnings season. The group cited a sharp fall in revenues at Gucci, which accounts for about half of group sales, as well as stagnation in China.

British consumer products giant Unilever is to lay off 7,500 people and spin off its ice cream division, a segment that was weighing on margins due to rising costs. The measures should be completed by the end of 2025 and will result in savings of 800 million euros over the next three years.

Among technology, Germany's Nemetschek (software) reported excellent 2023 results, proving its resilience during the transition to cloud products. However, the company was more cautious than expected for this year and the shares sold off. France's Atos plunged after Airbus ended talks to acquire its data and security exchange division.

In AI news, now a core theme in the stock markets, Nvidia's GTC conference provided good news for European companies: SAP, Europe's leading IT services provider, unveiled a partnership with Nvidia for its SAP Business AI platform. Siemens strengthened its cooperation with Nvidia for real-time immersive visualization, Schneider in data center infrastructure and Novo Nordisk in the creation of a supercomputer in Denmark to drive innovation in healthcare.

US Markets

Indices reached new highs, with the Nasdaq up +2.9% and the Dow Jones and Russell 2000 posting similar gains.

Investors focused on Nvidia's conference, which unveiled the new Blackwell super-intelligence chip and a partnership with Cadence Design Systems, among others. This was followed on Wednesday by comments from Jerome Powell, who noted that interest rates were at record highs in this cycle of monetary policy.

A number of quarterly reports were released, most of them well received by the markets. Fedex gained ground with the announcement of a higher than expected third quarter profit forecast. The group said that cost savings had helped it cope with reduced demand. Chipmaker Micron beat expectations across the board and raised its full-year forecast, a sign of its successful positioning in AI. SuperMicro Computer ended a period of strong market gains after a more difficult than expected share sale.

In the textile sector, Lululemon posted upbeat figures, but the share price fell as weak US demand is likely to persist this quarter. Nike followed suit by warning on 2024 sales.

Apple continued to grapple with legal problems: a rumoured partnership with Google's Gemini was overshadowed by the Justice Department's decision to sue the group for monopolising smartphone markets.

Japanese Markets

The NIKKEI 225 and the TOPIX rose by +5.17% and +5.06% respectively. In the first round of responses, wages rose by an average of 5.28% at large firms and 4.42% at small and medium-sized firms, and the Bank of Japan abandoned negative interest rates on 19 March, the first upward move in 17 years. It also decided to abolish its Yield Curve Control (YCC) and suspend further ETF purchases, reversing the large-scale monetary easing policy that had been in place since April 2013. On the other hand, the BoJ governor clearly stated: "Based on the current economic and price outlook, accommodative financial conditions will continue for the time being", and the bank said that JGBs could continue to be purchased. The policy shift had already been widely priced in and the confirmation of the bank's accommodative stance worked against bearish sentiment, causing the yen to weaken and sending stock markets to new all-time highs.

The yen initially traded around 148 against the dollar, before rising to 151 following the BoJ's decision. It ended the period around 151.