USA – consumers are more worried than investors.
Last week a slew of economic indicators was published in the US. The data were largely positive, and US stock market indexes hit new record highs. Investors have been reassured mainly by inflation figures. After stagnating for several months, consumer price growth resumed its downward trend towards more normal levels. Producer prices also rose by less than expected in May.
Yet the consumer price index is still firmly above the 3% mark. While investors were happy with these figures, the US Federal Reserve seems to have taken a different stance. At the meeting on 12 June, Jerome Powell and his colleagues welcomed the lower inflation figures but seemed in no hurry to loosen monetary policy.
From an investment perspective, it’s not all that important that market expectations are not aligned with the Fed's rate-cutting plans. What’s important is that a new cycle of monetary policy easing is about to begin for all the world's major central banks.
This easing is long overdue. The US economy has been particularly resilient in recent quarters, but it’s showing signs of running out of steam. Consumer confidence, which is key to GDP growth, has been knocked by the rising cost of living and very high borrowing costs. On top of that, other leading economic indicators have for some time been coming in below economists' expectations.
Let’s hope that inflation will start to ease more quickly so that the Fed can make its move before US growth starts to slow. The Fed has plenty of room for manoeuvre, and if it acts quickly – as the market hopes it will – the current period of economic expansion could well continue over the next few quarters.
Europe – uncertainty is back
The announcement of snap elections in France took many people by surprise, and the financial markets have been swift to react: the yield spread between French and German government bonds has widened and eurozone stock markets have come under pressure. The CAC 40 – and companies with significant exposure to the French market – have been hit the hardest. A potential victory by either the far-right National Rally or the left-wing Popular Front has sparked fears of uncontrolled spending. This has sent investors’ stress levels sky high, as the latest figures on France’s budget deficit and debt levels have not been all that reassuring. We think we can rule out the risk of “Frexit”, but visibility will remain low until investors have a better idea of the outcome of the elections. European stock markets and the euro are likely to struggle in this environment. However, we mustn’t forget that these kinds of political risks often create buy opportunities in the long run.
This week's figure : 33%
Almost a third of the S&P 500’s YTD gain of 14% has come from one stock alone: Nvidia. The semiconductor group is up 166% so far this year and is now the second-largest market cap in the US index.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
