Following Joe Biden's withdrawal, the election campaign was relaunched. Differences in gender, age and background between Harris and Trump promise an exciting race. The election platforms could hardly be more different. The outcome of the presidential race remains open. What are the implications for the capital markets?

In 2023, numerous geopolitical risks came to the fore, supplemented by interest rate hikes by central banks in the fight against inflation. The conflict in Ukraine will soon last two years. In addition, the situation in the Middle East has worsened, particularly between Israel and Hamas. An escalation of the conflict to neighboring Arab countries has been prevented so far. Economic weaknesses are also evident in two of Switzerland's key trading partners: China and Germany. These developments are leading to a lack of important impetus from foreign trade. Geopolitical issues will continue to play an important role in the coming year. However, the past has shown that the impact of such events on the global financial markets is often short-lived.

The KOF Swiss Economic Institute at ETH Zurich examines economic development in Switzerland as well as worldwide. The leading indicator for the global economic barometer already indicated in the second half of 2022 that economic growth will cool down in the coming months and is likely to bottom out in the first quarter of 2023. This currently indicates a clear recovery in growth. This is also the case in Switzerland, where the leading KOF indicator appears to be stabilizing and has bottomed out.

After Silvergate, SVB is the 16th largest bank in the U.S. and the next financial company to run into trouble last week. The Silicon Valley-domiciled bank is also primarily a link between venture capitalists and startups. The institution has grown rapidly since the liquidity glut in the wake of the pandemic. Some of its capital has been invested in default-proof long-term U.S. government bonds, which have yielded low but safe interest rates in recent years. As a result of the Fed's tighter monetary policy to combat inflation, yields on these bonds have risen and, accordingly, their value has fallen significantly. To avoid having to show this as a price loss on the balance sheet, a banking institution can carry its bonds at nominal value. As a rule, the bonds are held until maturity and repaid accordingly at 100%.

Pandemic-related supply shortages and Russia’s war in Ukraine drove inflation to 40-year highs in 2022. Excepting energy and agricultural commodities, virtually all asset classes saw losses last year, resulting in one of the worst annual performances in history for mixed mandates. Equity rallies, usually justified by speculation of a shift to less aggressive tightening on the part of central banks, usually lasted only a few weeks. Looking to the year ahead, the market is likely to continue to focus on the outlook for interest rates and inflation. While it looks as though the peak in inflation has been passed, it is unlikely to return to the central banks’ target level of 2% in the foreseeable future. This will continue to keep the markets on their toes.

The environment has become more difficult for investors. For some months central banks have been tightening monetary policy. The war in Ukraine and other geopolitical tensions are compounding an already problematic situation. Not least, the war is having an inflationary impact, further boosting price levels that were already elevated due to the effect of the Corona pandemic on global supply chains. Governments are trying to stabilize economies with tax cuts, stimulus packages and support for, or outright purchases of, ailing companies.

Jerome Powell’s speech was crystal-clear and markets are reacting.

A difficult first half-year is over. Practically all asset classes show a negative performance in the sixmonths to end-June. Central banks face tough policy decisions, the effects of which could be troublesome for capital markets.

A difficult first half-year is over. Practically all asset classes show a negative performance in the sixmonths to end-June. Central banks face tough policy decisions, the effects of which could be troublesome for capital markets.