​Inflation remains a major concern and continues to exert pressure on markets. At least inflation is declining in most economies. In the US, inflation is declining since July 2022 due to the most aggressive measures taken by the Fed in comparison to other economies. Inflation fell from over 9% to now below 5%. The EU’s inflation kept rising until September 2022 when it surpassed the 11% mark. The more hesitant central bank interventions and higher exposure to the war led to a substantially slower decrease. As of April 2023, inflation still remains slightly above 8%. Toward the end of 2022, the UK behaved similarly to the EU, but could not maintain this trend. As of March, inflation in the UK remained above 10%. The continued struggle of the UK – in comparison to the EU – is largely attributable to a combination of its higher food price inflation, high reliability on gas, and worker shortages as well as wage rises. The latest data revealed that the UK could substantially reduce its inflation in April to below 9%. China and Switzerland were able to keep their inflation below 4% throughout this period and have achieved decreasing inflation similar to the previously discussed economies, albeit for different reasons. Japan followed this development but saw a spike in inflation in April 2023, which stems from a surge in food prices. Figure 1 summarizes the inflation rate development from the beginning of 2022. Figure 2 shows the corresponding interest rate measures the various central banks undertook. The Fed took the most aggressive measures with the current range being between 5% and 5.25%. Market participants widely expected rate hikes to stop earlier in 2023, and it seems now that during the June meeting, there will be a break. However, officials stated that the fight against inflation is not over, and further hikes are still reasonably likely. This dampened the optimism of market participants, especially considering views at the beginning of the year with fewer increases and possible cuts as early as autumn. Such a development seems highly unlikely at this stage. The BoE followed the Fed’s development most closely. Unfortunately, it did not achieve the same results, as the substantial discrepancy in inflation data shows. The ECB took almost half a year longer to implement such measures. As of May 2023, central bank rates in the EU are still 1.25% lower than compared to the US. It is also reasonable to assume that the ECB will continue hiking to offset its currently substantially higher inflation. This can be attributed to the later reaction of the ECB in comparison to the Fed. Switzerland, which had fewer problems with inflation, required less severe interventions. In total, the SNB increased its core interest rate by 2.25% since May 2022. In contrast to other Western economies, its core interest rate sits at a moderate 1.5%. Asian countries, such as China and Japan have struggled little with inflation and needed no or only minor central bank interventions. Nonetheless, the countries still did not go through the aftermath of Covid unscathed. 

Figure 1: Inflation Rate in Percentages in the US, UK, EU, Switzerland, Japan, and China from January 2022 to April 2023, Sources: Stone Mountain Capital Research, Board of Governors of the Federal Reserve System, Eurostat, Office for National Statistics (UK), Swiss Federal Statistics Office, Ministry of Internal Affairs & Communication (JP), National Bureau of Statistics of China, May 2023

Figure 2: Interest Rates by the Central Banks of the US, EU, UK, Switzerland, Japan, and China from January 2022 to May 2023, Source: Stone Mountain Capital Research, Federal Reserve, ECB, BoE, SNB, BoJ, PBoC, May 2023

​Recession fears and interest rates keep holding investors on high alert. The ECB and the Fed both raised interest rates in their last meeting in May 2023. While the Fed hinted at a decent likelihood that interest rate hikes will stop, it is not the case for the ECB which emphasized that there is still more work to be done to get inflation under control. In particular in the US, this is a positive development, as the premise of no further hikes might be realistic for the time since the recent hikes started. Despite this outlook, the situation is still highly uncertain. A large contributor is the banking crisis, which already includes the second-largest insolvency of a bank. The pressure on the industry is continuing with the collapse of First Republic and subsequent acquisition by JPMorgan. The uncertainty is further increased by the debate on the debt ceiling of the US. So far, there has been little progress but there needs to be a solution fast, as according to some sources, the US could go bankrupt as early as June 2023. This development also led to the largest aggregate short position of US Treasuries in history. In the EU, officials of the ECB highlight that further measures are necessary, as inflation is not low enough yet and it has been staying at such high levels for too long. On the opposite end, there are more and more concerns arising from high rates. Many expect the banking crisis to keep continuing and lower growth rates, which is evident by the GDP growth of the EU in Q1 2023 of only 0.1%. In this rather critical state, gold has seen a resurgence over the past months. Gold reclaimed the $2k mark in early April 2023 and has maintained there ever since. The increased uncertainty also manifested itself in substantial inflows in gold ETFs in recent weeks. Thus far, hedge funds have done well in this challenging ecosystem. The industry mostly managed the initial drawdowns well. It also led to a more promising perception of hedge funds themselves, as the number of launches is comparable to pre-Covid levels for the first time. The industry also reached a new milestone of $5tn AuM according to Barclay. Fundraising remains an issue for all alternative asset classes with the exception of very large hedge funds. The fundraising problem is especially dire in private equity and venture capital funds. The private equity industry is starting to feel the pain from its delay from public markets and their drawdown a few months ago. Not only have valuations dropped by almost a third, but private equity-backed IPOs are virtually inexistent. Investments also have become more scarce. In particular venture capital has been hit hard, as quarterly investments have dropped by 50% YoY.