In a Nutshell

Our view on the markets

Strong start to the year

Equity markets kicked off the new year euphorically and with big share-price gains. However, the rest of the year won’t be a one-way street, in part because corporate earnings are likely to come under pressure. Investors also earned money with bonds in the early weeks of 2023. Since conventional government and corporate bonds have now resumed offering an attractive yield, investors are no longer forced to resort to less liquid and/or more complex interest-bearing alternatives for yield.

Smaller risk of a recession

The risk of a recession in Europe has diminished in recent weeks. China’s economy is reopening, natural gas storage facilities are well filled, and energy prices have pulled back considerably. Suddenly the glass is half-full again – business sentiment and consumer confidence have brightened. However, the year 2023 will present a challenge for central banks. Policy rates are in restrictive territory by now, and there is an elevated risk of monetary-policy mistakes.

The next US debt fracas

A raising of the US federal debt ceiling must be negotiated anew almost every year. The debt ceiling usually gets raised without any major friction, but not without detours and often at the last minute. This year, however, the potential risks and side effects of the debt debate are graver than they’ve been in a long time. A tougher confrontational attitude in Congress indicates that a full-blown debt fracas in the Capitol looms, and it is unlikely to leave the financial markets indifferent.

Bank of Japan under pressure

The Bank of Japan is the mother of monetary accommodation. Monetary-policy innovation and creativity have kept interest rates in Japan close to zero for years now. Today, though, this stands in starker contrast than ever to the macroeconomic fundamentals and to monetary policy in the rest of the world. Japan’s central bank is under enormous pressure and is likely to be compelled by the market to end its monetary-policy experiment sooner rather than later.

Liquidity of semi-liquid private-market assets

Semi-liquid private-market investment vehicles, popularly known as evergreen vehicles, have developed into a rapidly growing asset class. But they recently became a victim of their own success when some of them became no longer able to service all of investors’ redemption requests. This shows once again that there is no free lunch on the financial markets.

The filling of European natural gas storage facilities last summer at historically high prices at times exceeding EUR 300 per MWh was not in vain. Thanks to the very good fill level at the start of winter, the unusual warm spell at the turn of the year and the strenuous efforts by consumers to cut gas use, storage facilities were still around 75% full as of the end of January. That’s 35 percentage points higher than at the same time last year and 20 percentage points above the average for the last five years. This comfortable situation has multiple beneficial consequences: the outlook for economic growth (more) and inflation (less) is improving, pressure has been taken off government budget deficits, and the outlook for winter 2023/24 is getting better. By now, not even the icy weather of the past couple of weeks has been able to shock the market any longer. Despite the cold temperatures, the price of natural gas has stayed at around EUR 60 per MWh, similar to the level prior to the outbreak of the conflict in Ukraine.