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Greater budgetary rigour means economic momentum in Europe is weaker than in the United States. This is the view of Guy Wagner, Chief Investment Officer at BLI – Banque de Luxembourg Investments, and his team in their latest monthly market analysis.
US GDP growth accelerated in the second quarter of 2018. This is primarily due to domestic consumption, which was driven up by the US fiscal reform voted through at the end of 2017 that saw income tax cuts for individuals and businesses. It is also due to an increase in public spending. On the other hand, GDP growth in the eurozone slowed slightly over the same period. “Europe’s weaker growth than that of the United States is primarily due to greater budgetary rigour”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments.
Equity markets perform well
The major equity markets were up in July. This was due to the publication of good quarterly corporate earnings, as well as European Commission President Jean-Claude Juncker’s visit to US President Donald Trump, which helped ease tensions over import tariffs that had locked Europe and the United States in a standoff lasting several months. At the moment, the outlook for equity markets in the short term depends on how the trade war between the United States and China pans out. With talks stalled, the imposition of tariffs on 200 billion dollars’ worth of Chinese imports is unnerving investors.
Federal funds rate remains unchanged
As expected, the US Federal Reserve left the federal funds rate unchanged at its midsummer meeting. In its press release, it described the pace of economic growth as “strong”, suggesting an interest rate hike at its next meeting at the end of September. In Europe, the ECB also left its monetary policy unchanged. As previously announced, it will reduce its net asset purchases to 15 billion euros from October and end its quantitative easing programme by the end of the year.
Investors show little enthusiasm for government bonds
Bond market yields firmed up slightly in July. In a positive equity market environment, investors showed little enthusiasm for government bonds, which remain an unattractive asset class for the time being. “Their main interest for investors is as a safe haven in times of crisis”, says Guy.
