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While the economic boom triggered by the massive fiscal and monetary support measures was initially limited to manufacturing activity, it is gradually spreading to service activities as the vaccination campaigns progress and economies increasingly open up, write Guy Wagner and his team write in their latest market report "Highlights".

“In both the United States and Europe, the gap between manufacturing and service sector business indices has virtually disappeared, with almost all indicators at record levels”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “The economic boom is expected to continue during the summer months as the warmer weather will be better for the health situation. Economic uncertainties are likely to ratchet up as autumn approaches, since increasing contact indoors will provide decisive information on the effectiveness of vaccines against new variants of the coronavirus.”

In China, the more moderate pace of growth has been corroborated

In China, the more moderate pace of growth suggested by the economic statistics at the beginning of the second quarter has been corroborated and concerns both household consumption and industrial production. “Nevertheless, this slowdown should be seen in perspective, as China’s GDP growth for full-year 2021 is still estimated at around 8%.” In Japan, exports have been extremely dynamic, benefiting from particularly robust global manufacturing demand. 

Equity markets closed the first half of the year on a positive note

Equity markets closed the first half of the year on a positive note. With no setbacks in the first six months of the year, the MSCI All Country World Index Net Total Return in euros rose 15.9% since the start of January. In the United States, the equity market rally propelled the S&P 500 and the Nasdaq to new all-time highs. “In terms of sectors, there was a slight rotation from financials and cyclicals, which have made strong gains since the beginning of the year, to technology and healthcare, which have tended to lag in recent months”, underlines the Luxembourgish economist. 

Federal Reserve: potential rate hikes already in 2023 instead of in 2024

Although the FOMC left monetary policy unchanged at its June meeting, for the first time since the outbreak of the pandemic, Fed Chair Jerome Powell signalled his intention to prepare for a moderation of the extreme monetary support measures. He suggested that talks on tapering the Federal Reserve’s asset purchases might begin soon. Guy Wagner: “Even if an FOMC debate on the timing of future interest rate hikes may be premature, the majority of its members now consider that there could be two 25 basis point rate hikes in 2023 instead of in 2024 as previously estimated, bringing forward the expectations of monetary tightening beginning by one year.” In Europe, the Governing Council of the ECB has given no indication of a change in the expansionary nature of its current monetary policy.

Government bond yields remain stable

Despite the deterioration in inflation statistics, US Treasury yields have been surprisingly stable. The yield on the 10-year US Treasury note even declined slightly over the month. In the eurozone, long-dated yields also fell slightly, with the benchmark 10-year government bond yield dropping in Germany, in France, in Italy, and in Spain.

Guy Wagner, Chief Investment Officer

Originally from a family of entrepreneurs in Luxembourg and with a degree in Economics from the Université Libre of Brussels, Guy joined Banque de Luxembourg in 1986, where he was successively responsible for the Financial Analysis and Asset Management departments, then became Managing Director of BLI - Banque de Luxembourg Investments, an asset management company newly created in 2005.

From July 2022 on, he devotes himself exclusively to his role as Chief Investment Officer, to the management of the portfolios and to the management of the team in charge management of the various funds.

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