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Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, and his team share their monthly analysis, “Highlights”, in which Guy Wagner reviews the macroeconomic context and events on the financial markets in August.
After two years of uninterrupted growth, international trade stagnated in the second quarter of 2018 as a direct consequence of trade tensions. The United States were the least affected as corporate investment and household consumption had considerably more impact than exports, which only account for 12% of GDP. In the eurozone, greater dependence on external demand is starting to lead to a slowdown in industrial production. In China, the deceleration of the economy following trade tensions with the United States has forced the government to grant more tax breaks to companies and to facilitate access to credit for small and mid-size companies. Trade tensions and the strength of the dollar are particularly worrying for emerging markets, and Turkey and Argentina no longer seem able to escape a severe economic crisis.
Inflation and monetary tightening in the United States
In the United States, inflation is now at the upper end of its range in recent years. Headline inflation remained unchanged at 2.9% in July, while inflation excluding energy and food climbed from 2.3% to 2.4%. In the eurozone, inflation dropped back very slightly in August, from 2.1% to 2%. Excluding energy and food, inflation fell 0.1%, coming in at 1% compared to 1.1% the previous month. At the Federal Reserve’s annual Economic Policy Symposium at Jackson Hole, Fed Chair Jerome Powell reiterated the strategy of gradually raising interest rates if wages and employment continue to improve. The Fed’s next monetary policy committee meeting will be held in September.
Mixed fortunes on the bond markets
There was considerable divergence in bond yields in August. The lack of any let-up in trade tensions between China and the United States and the deterioration of the economic situation in several emerging markets have prompted investors to seek safe havens ahead of more risky issuers. The 10-year government bond yield declined in the United States (from 2.96% to 2.86%) and Germany (from 0.44% to 0.33%), whereas it rose in Italy (from 2.72% to 3.24%) and Spain (from 1.40% to 1.47%). With such low yields on offer, government bonds continue to be an unattractive asset class. Their main interest for investors is as a safe haven in times of crisis.
Equity markets and currencies saw mixed performance in August
Over the month, the S&P 500 in the United States was the only index to rise (+3.0% in USD), while the Stoxx 600 in Europe (-2.4% in EUR), the Topix in Japan (-1% in JPY) and the MSCI Emerging Markets (-2.9% in USD) posted negative performances. Due to the strong weighting of US equities globally, the MSCI All Country World Index net total return expressed in euros was up 1.3%. The continuing increase in protectionist trends since the introduction of trade tariffs on steel and aluminium imports in the United States and the resulting economic risks for the rest of the world have encouraged American investors to focus on their domestic capital markets. In addition, the tax reform in December 2017 is boosting economic activity and corporate earnings in the United States. As a result, the US equity markets have outperformed significantly, and are continuing to grow, especially compared to European and emerging markets.
The dollar appreciated slightly against the euro in August, with the euro/dollar exchange rate dipping from 1.17 to 1.16. In the first half of the month, the dollar was strengthened by the potential impact of the Turkish crisis on the European banking sector. However, the dollar gave up the bulk of its advance in the second half of the month due to US President Trump’s criticism of the Federal Reserve for its strategy of gradually tightening its monetary policy.
