On Sunday, it was exactly 50 years ago when then-US President Richard Nixon, on August 15, 1971, unilaterally ended the convertibility of the dollar into gold at the parity of $ 35 per troy ounce. This act de facto ended the Bretton Woods monetary system, which was founded at the end of World War II in 1944. Since August 15, 1971, the global monetary system has been based on fiat money and free-floating exchange rates. A nice article on this anniversary and the consequences of the end of the Bretton Woods monetary system for the global economy, titled “The End Of The Gold Standard. Fifty Years Of Monetary Insanity "wrote the Spanish economist and investor Daniel Lacalle here.
Data on Czech inflation for July were published on Tuesday. Year-on-year consumer price inflation accelerated faster than analysts expected. Year-on-year inflation growth in the Czech economy reached 3.4% in July after 2.8% in June. Thus, Czech inflation remains well above the Czech National Bank's 2% inflation target. At the same time, according to estimates by some economists, the inflation rate could rise to 4% at the end of this year.
US inflation data was released on Wednesday. In July, the year-on-year growth of consumer prices in the world's largest economy was 5.4%, which is the same value as in June. Inflation in the US continues to be at its highest level since 2008 and is also significantly higher than the 2% inflation target of the US Federal Reserve. On Thursday, data on the dynamics of producer prices (PPI – Producer Price Index) were published in the US. In July, the PPI index rose more than expected, when the year-on-year increase of the index was 7.8%. Given that producer prices tend to be reflected in consumer prices with some lag, it is possible that consumer price inflation in the US will accelerate further in the coming months.
As regards financial markets, major stock indices continued to grow last week, recording further new all-time highs. The broadest global stock index MSCI All Country World recorded a gain of 0.7% and probably the most watched stock index, the US stock index S&P 500, also recorded a gain of 0.7%, and ended the week at a new record of 4468 points. Once again, the Central European region, which is our preferred region, did very well. The CECEEUR index recorded a gain of 1.2%.
Overall, global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.0, which is still close to the all-time high. The average global equity valuation is thus currently around 2.0 standard deviations above the historical average, which is approximately at the level from the market peak in 2000. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five to seven years on the basis of the broadest global stock index MSCI All Country World are unlikely to exceed 5%.
Bonds also made modest gains last week. The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, recorded a gain of 0.2%, while the average global bond yield to maturity remained at 1.02%. In real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -3.2%. Negative real inflation-adjusted bond yields to maturity are referred to as financial repression. On the other hand, the Czech government bond index fell relatively sharply by 1.1%, with the yield to maturity on the Czech 10-year long-term government bond rising by 0.16 percentage point to 1.86% (bond prices and bond yields to maturity move in the opposite direction). The performance of corporate bond indices was around zero.
As for my outlook on bonds, they are currently expensive as well as equities. Therefore, I believe that bond returns will be below average over the next five to seven years compared to the historical trends.
Commodities have not seen much movement over the past week. The S&P GSCI global commodity index rose 0.7%. The price of the barrel of the North Sea Brent fell slightly by 0.2% to $ 71. Gold rose 0.8% to $ 1,776 per troy ounce.
US dollar weakened last week. The DXY dollar index, which measures the dollar's performance against a basket of other major currencies, weakened by 0.3%. Against euro, dollar weakened by 0.3% to 1.180 USD/EUR. Koruna weakened against dollar by 0.3% to the level of 21.58 CZK/USD and, on the contrary, strengthened slightly against euro by 0.1% to the level of 25.39 CZK/EUR.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.