Positive KOF, Markets fully risk-on, but for how long?

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Swiss KOF leading indicator, designed to predict the Swiss economy over the next 6 months hit a new high reading at 102.9 since 1 year. The KOF continues to  trend higher, which is a sign Swiss companies have started to adapt to the stronger franc.

​Optimism can also be seen in the markets now fully risk-on. The SMI currently trade above 8300  and could be heading towards last years close around 8600, over the next couple of days/weeks.

The Dollar rallied following Janet Yellen’s comments on Friday as she said that it would be appropriate to raise rates in the “coming months”. Market probability pricing for a July rate rise lifted to 53.8%. This could increase in case of positive data this week (consumer confidence on Tuesday, ISM manufacturing on Wednesday , NFP on Friday.

The USD/CHF rallied 500 bp in nearly 2 weeks, as risk appetite returned and the probability of a Fed hike increased. EUR/CHF is holding well above 1.10, but likely to trade sideways, considering the threat of more QE by the ECB.

Is the current rally sustainable?

We doubt so. A strong dollar and potential rate hikes by the Fed were the very reason for the Chinese’s, Emerging markets and commodities slump, which drove global risk appetite strongly south at the start of the year. Hence we would expect the market volatility to return as the US dollar continues to strengthen.

Equity valuation have benefitted from excess liquidity and cheap money for years. The normalisation of the world’s biggest economy should logically lead to a re-evaluation of equity markets downward. We recall that the SP500 index trades at an average P/E (e2016) of 17.8x, which is well above the 5 year median of 15.5x. The SMI index trades at 17.4x vs the 5yr median at 15.20x

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