The stock market falls in June illustrate the extent to which the financial markets are becoming increasingly dependent on political decisions while at the same time reflecting economic reality less and less. This is the view of Guy Wagner, Chief Investment Officer at Banque de Luxembourg, and his team, published in their monthly analysis, ‘Highlights’.
The lack of agreement between Greece and its creditors hung over the stock markets in June. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets all fell. «The market falls illustrate just how dependent the financial markets have become on political decisions even though these are increasingly divorced from economic reality,» says Guy Wagner, Chief Investment Officer at Banque de Luxembourg and Managing Director of BLI – Banque de Luxembourg Investments. «Provided the political blackmail strategies like those we saw in the negotiations between Greece and its creditors do not lead to a general destabilisation of the financial system, investors are likely to continue to favour equities due to the lack of prospects of an increase in yields on the bond and money markets.»
Static global economic situation
The global economic situation is fairly static, with no major signs of picking up or slowing down. In the United States, activity is getting back to normal after a weak start to the year. In Europe, the economic situation is improving slightly due to the weak euro, albeit without any sign of a significant recovery. In Japan, the economy is continuing to mark time. In emerging markets, there is continuing fragility in several of the major economies, such as China, Brazil and Russia.
Eurozone inflation should stay in positive territory in the coming months
With the stabilisation of oil prices, inflation rates have consolidated at low levels. In the United States, inflation edged up from -0.2% in April to 0% in May. In the eurozone, the inflation rate remained in positive territory, at 0.2% in June compared to 0.3% in May. «Unless oil prices drop back, eurozone inflation should stay in positive territory in the coming months,» says Guy Wagner.
Core eurozone countries’ long rates still unattractive
The upturn in long rates that began at the end of April continued in June. The rise in bond yields affected the peripheral countries rather than the core eurozone countries due to the uncertainty over the situation in Greece. Over the whole month, the 10-year government bond yield rose in Germany, Italy, Spain and the United States. «Despite the rise, the long rates of core eurozone countries are still unattractive. In industrialised countries, US government bond yields are the only valid alternative given that they still have potential to appreciate if deflationary pressures set in,» suggests the Luxembourg economist.
Markets no longer worried by Greece’s possible exit from the eurozone
Despite the uncertainties over Greece, the euro firmed slightly in June. Greece’s possible exit from the eurozone no longer seems to concern the markets unduly, given that there is only a low risk of contagion to other peripheral countries. And given the last news and the deal with Europe. According to Guy Wagner: «Despite the recent stabilisation of the euro, the dollar’s upward trend that began in May 2014 is set to continue as long as a US interest rate hike in the second half of the year remains the most likely scenario.»