During February, equity markets continued the favourable run that had begun in the wake of Donald Trump’s election as US president in November 2016. Yet again, November to May seems to be a particularly fruitful period for shareholders. “In contrast to the last two months of 2016, so-called ‘defensive’ stocks such as consumer and healthcare joined the rally and outperformed financial and energy stocks”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI – Banque de Luxembourg Investments.
An increasing acceleration in economic growth is unlikely Even though latest economic figures continue to show a positive trend, an increasing acceleration in economic growth is unlikely. “Hopes of economic activity gathering pace are mainly based on the sharp increase in consumer and business confidence indices since gross domestic product growth figures are not showing any marked improvement in the economy.” The upturn in oil prices, the strength of the dollar and the reduction in Beijing’s support measures point more towards a gradual slowdown in the pace of global economic growth during the year.
Higher interest rates in the United States expected in March Recent comments from the US monetary authorities suggest that it is highly likely that the Federal Reserve will raise its key interest rate at the Committee’s next meeting in March. In Europe, the Central Bank is continuing its negative interest rate policy despite the upturn in inflation. In China, the public authorities have slightly tightened monetary conditions to dampen the credit boom. Widening of the gap between government bond yields in northern and southern European countries? Bond yields saw little change in February.
In the United States, the yield on the 10-year Treasury note dipped slightly. “If the economy slows during the year, US bond yields could be driven lower in 2017”, estimates the Luxembourgish economist. In the eurozone, the 10-year bond yield dropped slightly in Germany, in France and in Italy. In Spain, it inched up marginally. Guy Wagner: “Uncertainties over the outcome of the French presidential election in May could lead to a widening of the gap between government bond yields in northern and southern European countries in the coming weeks.”
Further appreciation of the US dollar against the euro After a slight dip in January, the dollar appreciated against the euro in February, with a light drop in the euro/dollar rate. The dollar was buoyed by the prospect of higher interest rates in the United States, future changes in US taxes (which would lead to a reduction in the current account deficit), and the uncertain outcome of the French presidential election. “In the longer term, the euro seems to be undervalued against the dollar, as suggested by Germany’s growing trade surplus compared to the United States”, concludes Guy Wagner.
Guy Wagner, CIO at Banque de Luxembourg and managing director of the asset management company BLI – Banque de Luxembourg Investments.