US tax reform should contribute to a favourable year-end climate on the equity markets

Equities are holding up on the back of good corporate results, and a slight improvement in global economic growth. Progress on tax reform in the United States should contribute to maintaining a favourable year-end climate on the equity markets.

In 2017, global GDP grew at its fastest rate for 5 years. In the United States, GDP growth has been relatively stable at around 2% “since scant potential for improvement on the labour market and the moderate increase in wages are preventing domestic consumption from picking up pace”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI – Banque de Luxembourg Investments. In the eurozone, most economic indicators are continuing to deliver favourable surprises, “with the potential for improvement on the labour market remaining considerably higher than in the United States”. In Japan, extremely expansionary monetary and fiscal policies have now ramped up growth. In China, in the wake of the Communist party congress, the authorities seem to be focusing on temporarily slowing economic growth to help counteract the excesses of recent years.

Equities are holding up
In November, most equity market indices continued in good heart. The S&P 500 in the United States, the Topix in Japan and the MSCI Emerging Markets (in USD) grew slightly. European equity markets were alone in posting a decline. “Equities are holding up on the back of good corporate results, a slight improvement in global economic growth and continuing very low interest rates”, argues the Luxembourgish economist. “Progress on tax reform in the United States should contribute to maintaining a favourable year-end climate on the equity markets, even if it does bump up US public debt in the coming years.”

Federal Reserve: additional 25 basis point increase in federal funds rate is almost certain
Following the European Central Bank’s announcement at the end of October that the quantitative easing programme would start to be scaled back from January 2018, it gave no further indications in November about the future direction of its monetary policy. In the United States, an additional 25 basis point increase in the federal funds rate is almost certain.

10-year government bonds remain stable
In the eurozone, bond yields barely moved in November. The 10-year government bond yield rose in Germany, and dipped slightly in Italy, and in Spain. In the United States, long-dated bonds were also very stable. Guy Wagner: “Generally speaking, the bond markets still hold little appeal.”

Euro could hold firm against the dollar
After a slight rebound in October, the dollar dipped again in November, with the euro/dollar exchange rate up from 1.16 to 1.19. Even with Merkel’s failure in Germany to form a coalition with the liberals and the greens, and despite progress on tax reform in the United States, the dollar was unable to sustain last month’s gains. “Provided eurozone economic data continue to come in above expectations, the single currency could hold firm against the dollar”, concludes Guy Wagner.

Guy Wagner, Chief Investment Officer at BLI – Banque de Luxembourg Investments

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