Uncertainty in the Global Economy
International financial markets have recently been facing the rising uncertainty related to the macroeconomic environment around the world, both in developed economies (the US and the Eurozone); at the same time, the global economy continued to slow down more than consensus forecasts projected.
In the US, uncertainty is mainly related to the policies carried out by the Fed’s Chairwoman Janet Yellen and the timing she will set for the increase in interest rates. After the positive results achieved in 2014, in particular in terms of GDP growth and consumer spending, markets were expecting the Fed to hint at an incoming rise in borrowing costs (approximately, in mid-2015): the disappointing data about Q1 GDP (below expectations) and the number of jobs added by US employers (which fell sharply) made the rate rise a much more risky bet for investors.
In the FX market, the main consequence was the end of the bull run of the US dollar against the major currencies: the greenback is now at around $1.12 per euro, down from the 12-year high of $1.0692 reached just two months ago.
The ups and downs in the S&P 500 confirmed the higher volatility spurred by the Fed’s policies. In the Eurozone, instead, the main catalyst for European stocks, bonds and the euro is the ECB’s QE program, launched by President Mario Draghi in early March. The ECB “shopping list” (which is mainly composed of government securities) immediately pushed the average German yield into negative territory. Investors looking for a return, therefore, had to turn to junk bonds (which saw their greatest rally since the financial crisis) and to equities. With the Euro Stoxx 600 Share Index up an impressive 16% in April since the start of 2015 and a DAX index temporarily reaching staggering highs, markets were becoming pretty convinced about a prolonged rally on European rally, as justified by the record $9bn-inflow into European equity funds (mainly from the US) reported by in March by EPFR Global (a US fund data provider).
Markets, however, once again showed all their uncertainty about European stocks and the euro by reversing their expectations: in April, the DAX Index was among the worst-performing gauges in developed markets, with traders pulling almost €3.4 bn ($3.7 bn) in about two weeks from the biggest exchange-traded fund tracking German shares. Investors justified the new valuation by pointing out fears that European (and, in particular, German) shares had gone too far by reaching the most expensive levels in at least a decade, indicating the possibility of a bubble.
The UK recently lost the economic and political stability which allowed it to distinguish itself from the other European countries (in the last two year, its economy expanded 10 times faster than that of the Eurozone). Moreover, many clouds are hanging over the British recovery: in the first quarter of 2015 growth has halved from 0.6 to 0.3 per cent, casting doubts on the efficiency of the policies carried so far by the BoE and the government. The UK current account deficit has plunged to 5.5 per cent of national income last year, the worst reading since records began in 1948: such data signals the poor performance of British investments directed abroad.
Another economy (this time an emerging one) confirmed the ongoing global slowdown: China recently reported its GDP grew at the slowest pace in almost six years. The estimated rate of growth is now 5.3 per cent, well below the government’s 7 per cent target for the 2015 calendar year. Following the poor macroeconomic results, the People’s bank of China has announced a program which, according to analysts, does not resemble the recent QE implemented by Draghi, but is instead more similar to the European Central Bank’s program to provide cheap financing for banks under its “long-term refinancing operations” (used at the very beginning of the European credit crisis).
WRITTEN BY EMANUELE ERBA FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT