First of all, the commodity intensity of the economy has diminished massively in the past 50 years. In 1973, it took a barrel of oil to produce USD 1,000 of economic output; today only less than half a barrel is needed. Secondly, according to our commodity specialists, the disruptions in commodity markets can be resolved. The key is in tailor-made responses to each market, according to its particular circumstances.

Bond-yield curve models

This may also be the reason why capital markets are reacting far more resiliently to the shocks than the beaten-down investor sentiment would lead us to believe. If we run the numbers on our bond-yield curve models, the computer spits out a 16% likelihood of a sizeable economic contraction in the US
(see number of the week). This compares to more than 70% at the peak of the Covid-19 crisis two years ago and to 95% in 1973/1974, so we are much further away from a recession than intuition would warrant. You have to start thinking about an end to globalisation or other major tipping points in the system to come up with an inflationary bust anytime soon. As we argued last time, such long-term shifts can only be identified after a crisis or a war is over.

Conclusion for investors

So where does that leave investors for now? Last week, we witnessed a major buying thrust, which our technical analysts suggest is usually the first signal of a bottoming process in risk assets. Hence, they upgraded most equity markets back to Neutral, with the exception of mainland China and Hong Kong. This is also in line with our fundamental stance that the recent rhetorical support needs to be followed by concrete support measures. Or to put it more simply: Chinese policymakers have to walk the talk before bourses can follow.

Number of the week