Weekly Winzer: Positive Market Environment Facing Challenges

The market environment remains generally positive, but the combination of persistent inflation, geopolitical tensions, and climate-related challenges calls for a nuanced perspective.

The environment for risky asset classes remains fundamentally favorable. Global growth indicators are improving, while two major risks have recently subsided somewhat: a further escalation of tensions in the Strait of Hormuz and an abrupt end to the technology boom. As a result, the scenario of inflationary growth—which is favorable for risky investments—remains intact for the time being.

Nevertheless, it is too early to assume the risks have passed. Geopolitical conflicts and the consequences of climate change are increasingly affecting the global economy simultaneously. This dynamic has a stagflationary effect: the supply of energy, transportation capacity, and other key factors of production is becoming less available or more expensive. Higher costs reduce household purchasing power and put pressure on corporate margins. At the same time, limited availability can trigger additional price increases.

The base scenario therefore remains positive but vulnerable to disruptions.

Growth: The global economy is gaining slight momentum

The key growth indicators point to a moderate acceleration in the global economy. These include the purchasing managers’ indices (which are trending upward), Germany’s expansionary fiscal policy, the beginning of an inventory buildup, and spillover effects from the technology and AI boom into other sectors of the economy. Fiscal support measures in China are also having a stabilizing effect.

Global growth of around 2.6 percent is expected for 2026. In developed economies, real gross domestic product is projected to grow by about 1.6 percent in 2026 and around 1.7 percent in 2027. The global economy is thus operating roughly at its potential, possibly even slightly above it.

However, growth is distributed very unevenly. Regionally, the US in particular, as well as technology-oriented economies such as Taiwan and Singapore, are showing comparatively strong momentum. In the eurozone, growth is still low but is expected to gradually gain momentum. There are also significant differences across sectors: While IT, infrastructure, and investment-related sectors are expanding, growth in many traditional economic sectors remains subdued.

US: Weak Labor Market, Strong Technology Momentum

This dichotomy is particularly evident in the US Employment growth has fallen to just around 20,000 new jobs on a three-month average. This is a warning sign, but not yet clear evidence of an impending downturn. The relationship between employment growth and economic growth appears to have shifted.

In addition, however, the technology boom is making an exceptionally large contribution to growth. Investments in information technology, data centers, semiconductors, and AI infrastructure are estimated to contribute about 0.8 percentage points to US GDP growth. The share of investment income in GDP has reached a very high level of about 18 percent. This supports corporate profits and provides, at least in part, a fundamental justification for the high stock valuations.

Unit labor costs are also showing a favorable trend. Their year-over-year growth has fallen to around 1.4 percent, primarily because hourly compensation growth has slowed to about 3.7 percent. Productivity growth, meanwhile, has remained stable so far (2.2% year-over-year). The hoped-for broad-based productivity gains from artificial intelligence are therefore not yet evident at the macroeconomic level. The immediate effect of the technology boom currently lies more in higher investment, profits, and investment income than in a sharp rise in productivity.

Private consumption is key to the economic outlook going forward. So far, it has been strong to solid in the US, but has been financed in part by a declining savings rate and rising asset values, particularly in the stock market. Retail sales figures due out this Friday are therefore an important indicator of whether consumers can maintain their spending despite slowing job growth and persistently high prices.

Inflation: Will 3 Percent Become the New 2 Percent Target?

Inflation rates remain stubbornly above central banks’ targets. For developed economies, an inflation rate of around 3.3 percent is expected for the fourth quarter of 2026. It may not fall back to about 2.3 percent until the end of 2027.

This raises a fundamental question: Could an inflation rate of around 3 percent effectively become the new normal?

Several structural factors point in this direction:

1. The working-age population is growing more slowly or declining.
2. Deglobalization and economic nationalism are driving up production costs.
3. Geopolitical conflicts are leading to more frequent energy and supply shocks.
4. Building more resilient supply chains requires additional inventory and investment.
5. Climate change and adaptation measures are driving up the costs of energy, transportation, and infrastructure.
6. High levels of government debt make it difficult to maintain a strongly restrictive monetary policy over the long term.

Nor is the AI boom automatically deflationary in the short term. Initially, it increases demand for data centers, electricity, semiconductors, copper, and other scarce resources. The associated investments have an immediate effect of driving growth and pushing up prices. Any price-dampening effect resulting from higher productivity is likely to materialize, if at all, only after a time lag.

Central Banks: Small Interest Rate Hikes to Safeguard Credibility

Central banks face a difficult trade-off. On the one hand, employment growth in the US is weak, and the economy in Europe remains sluggish. On the other hand, inflation stays well above target levels, while overall economic growth is at or slightly above potential.

The most likely scenario, therefore, is small but symbolically significant hikes in key interest rates. These are intended to prevent higher long-term inflation expectations from becoming entrenched. At the same time, the aim is to avoid overly aggressive rate hikes that could trigger an economic downturn.

For the US Federal Reserve, the upper end of the target range is expected to rise from 3.75 to 4.0 percent by December 2026. For the ECB, an increase from 2.25 to 2.5 percent is anticipated. Despite these steps, monetary policy would remain neutral to accommodative overall due to comparatively low real interest rates.

At the Federal Reserve, a shift in communication strategy is also taking place. Fed Chairman Kevin Warsh is refraining from providing specific forward guidance, while several members of the Open Market Committee are explicitly advocating for interest rate hikes. For the bond markets, both developments point in the same direction: either expected policy rates will rise, or uncertaintyand, with it, term risk premiums will increase. Both factors tend to point toward higher yields.

Currencies: Interventions Do Not Solve Japan’s Underlying Problem

Noteworthy was the joint intervention by the US and Japan to prop up the yen. As part of the intervention, the US bought yen and sold euros. The European Central Bank was informed only after the fact.

One possible motivation is to stabilize the yen without forcing Japan to engage in extensive sales of US Treasury bonds. Such sales could further reinforce the already upward trend in yields on the US bond market.

Nevertheless, a sustained reversal in the yen’s trend remains difficult to imagine as long as Japan’s monetary and fiscal policies remain expansionary. Interventions can slow the depreciation, but they can hardly eliminate the fundamental causes of the currency’s weakness. Therefore, the outlook for the yen continues to be neutral. On the other hand, the US technology boom, combined with the Fed’s expected interest rate hikes, continues to support the US dollar against the euro.

A broader appreciation of Asian currencies would also have global consequences. A strengthening of the yen, renminbi, and South Korean won would make exports from these countries more expensive. For the rest of the world, this would create an inflationary impulse that could exert additional upward pressure on yields. In the affected Asian economies themselves, the effect would be more deflationary and could point to falling yields.

Geopolitics and Climate: Supply Shocks on Multiple Levels

Talks between Oman and Iran regarding the Strait of Hormuz have initially contributed to a decline in oil prices. However, a permanent reopening of the strait is by no means guaranteed. Iran’s political conditions, the US position, and issues regarding monitoring, security, and potential transit fees remain key obstacles.

As long as no robust solution is in place, the risk of another spike in energy prices persists. Even if the strait were to reopen, shipping traffic would likely return to normal only gradually. In addition, increased insurance and security costs could persist in the long term.

At the same time, extreme weather conditions are placing additional strain on energy supply and transportation. Heat waves in Europe are increasing electricity demand for air conditioning. Meanwhile, high water temperatures and low water levels are impairing electricity production at certain nuclear and coal-fired power plants that rely on river water for cooling.

Shipping is also affected. Low water levels in European rivers are driving up the cost of freight transport. In the Panama Canal, high demand for transit rights is leading to rising transit costs. As a result, several supply shocks are converging simultaneously: energy, cooling, shipping, and logistics are becoming more expensive or less reliable.Der Klimawandel wirkt dadurch nicht nur langfristig. Er wird zu einem aktuellen makroökonomischen Faktor, der Inflation, Investitionen und Lieferketten beeinflusst.

Therefore, climate change is not merely a long-term issue. It is becoming a current macroeconomic factor that influences inflation, investment, and supply chains.

Impact on Positioning

The environment described above calls for a fundamentally positive but selective positioning:

• Equities remain overweight because growth is resilient and tail risks have eased somewhat.
• US equities as a whole remain underweight, primarily due to high market concentration. Within the US, however, preference is given to high-quality companies, IT, high-dividend stocks, and companies with solid earnings.
• European small-cap stocks, Japan, Latin America, and commodity and mining companies are benefiting from the investment cycle, a value-oriented approach, and rising metal prices.
• Duration remains moderately short, as persistent inflation risks, high levels of investment, and modest increases in key interest rates point to rising yields—or at least yields that are unlikely to fall sustainably.
• Government bonds remain underweight, while EUR corporate bonds, emerging-market bonds denominated in local currency, and money market investments are favored.
• Commodities are viewed as neutral overall. Industrial metals are receiving structural tailwinds from AI, infrastructure, the energy transition, and defense. In the energy sector, however, geopolitical developments are the dominant factor.
• Gold remains attractive in the long term, but in the short term it is being held back by potential profit-taking and slightly rising key interest rates.
• The US dollar is favored over the euro, while the outlook for the yen remains neutral.

 

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