BLI: No clear trend to set in on equity markets
Stock market volatility remains particularly low despite a great many political uncertainties and pressure on corporate earnings growth. A month away from US presidential elections with an uncertain outcome, a clear trend is unlikely to set in on the equity markets, according to Guy Wagner, CIO at BLI – Banque de Luxembourg Investments.
The global economy continues to see stable moderate growth. In the United States, the latest economic statistics suggest that GDP will continue to grow by around 2%. In September, the S&P 500 in the United States and the Stoxx 600 in Europe remained unchanged, while the Topix in Japan fell 0.5% and the MSCI Emerging Markets (in USD) gained 1%.
“Stock market volatility remains particularly low despite a great many political uncertainties and increasing pressure on corporate earnings growth”, Wagner said. “A month away from US presidential elections with an uncertain outcome, a clear trend is unlikely to set in on the equity markets.”
In Europe, economic growth – albeit modest – has not slowed significantly despite Brexit, the refugee crisis and political uncertainties in a number of countries. In Japan, hopes of an economic upturn rest on the government’s recent stimulus package and new quantitative easing measures. In China, public support measures aimed at ensuring economic growth in line with objectives are compounding the problem of industrial production overcapacity.
Interest rates unchanged
In September, the US Federal Reserve left its key interest rate unchanged at 0.5%. However, it pointed out that the economic conditions for monetary tightening were coming to fruition, leaving the door open for an increase in interest rates before the end of the year.
In Europe, the ECB left the door open for further quantitative easing measures in the future. In Japan, the central bank added the supplementary measure of ‘yield curve control’ so that long-term interest rates remain fixed at 0% even if short-term interest rates were to go a little further into negative territory.
“More generally, the Bank of Japan has indicated that it expects to sustainably exceed the 2% inflation target in the coming years”, Wagner says.
In the UK, the Bank of England left interest rates unchanged, stating that it is likely that it will cut rates further by the end of the year, even if the immediate impact of Brexit on the UK economy seems to be less marked than was expected even a month ago.
Bond yields almost unchanged
Bond yields saw little change in September. Over the month, the 10-year government bond yield declined in Germany and in Spain while it went up slightly in Italy and in the United States.
“In the eurozone, the yield to maturity on most government bond issues is paltry or even negative. In the United States, long yields are slightly higher due to expectations of a progressive tightening of American monetary policy,” Wagner said.