Despite the leading banks’ zero interest rate policy and weak oil prices, the global economy is in danger of a slowdown, according to Guy Wagner, Chief Investment Officer at Banque de Luxembourg and Managing Director of BLI – Banque de Luxembourg Investments, and his team, in the monthly market analysis, ‘Highlights’.
In the United States, the GDP increase in the 4th quarter of 2014 was driven by domestic consumption, while investments and exports showed signs of weakness. «Outside the United States, economic activity is fragile in most regions,» says Guy Wagner. «In Europe and Japan, the recent slight improvement in the main economic indicators does not point to a significant upturn, given the weakness of the comparison bases.» In China, the slowdown in economic growth looks set to continue and could prompt the public authorities to embark on support measures in the coming weeks.
Government bonds continue to surprise with their extraordinary performance
The ECB’s pronouncement of a massive programme of quantitative easing has prompted a further fall in long rates, even though they were already extremely low. In the Eurozone, yields on 10-year government bonds fell in Germany, Italy and Spain. Bond yields have also dropped in the United States. «Despite the miserable level of long rates, government bonds continue to surprise with their extraordinary performance,» says the Luxembourg economist. «The only scenario in which government bonds can continue to pull off good surprises would be if negative interest rates were introduced on a grand scale by the central banks – something that cannot be excluded given the prospects of economic slowdown.»
Investors consider equities as the default investment
In January, stock market developments were largely determined by fluctuating currency values. The euro’s weakness helped the Stoxx 600 Index to grow in Europe, while Japan’s Topix and the MSCI Emerging Markets (in JPY and USD respectively) stagnated and the S&P 500 (in USD) fell. Guy Wagner: «Given the euro’s decline against the dollar and the yen, stock market investments produced particularly decent results for a European investor in January. In a zero interest rate environment, investors continue to view equities as the default investment despite the steady advance of deflationary pressures – well illustrated by the escalating devaluation race.»
The dollar’s upward march is likely to continue
In January, the euro fell sharply against the US dollar as a result of the ECB’s announcement of a massive programme of quantitative easing. «Although the dollar’s impressive rise in January would suggest a temporary period of stabilisation is due, the currency’s upward march is likely to continue until and unless a rise in US interest rates is called into question.»