Since 2014, Brazil has been caught up in one of the most important crises in its history from which it is struggling to emerge. The Gross Domestic Product (GDP) of the eighth largest economy in the World (see chart 2), and the most important in Latin America, fell by 8% between 2014 and 2016, in complete decorrelation with the good dynamics of other major emerging countries, such as Mexico (see chart 3). As a result, inequalities are widening. After affecting 13.7% of the working population, the unemployment rate has stagnated at 12% for several years (see chart 4). Brazilians are seeing their purchasing power eroded, with wages rising at a slower rate than the cost of living, particularly in industry.
On Thursday evening, the Italian government set its deficit for the next three years at -2.4% of GDP, despite the risk of increasing its debt to one of the highest in the world. The Italian anti-system parties, Salvini’s League (far right) and Di Maio’s 5-star Movement (far left), won the deficit battle against the Minister of Finance, Giovanni Tria. To be clear: this is bad news.
The Brexit negotiations are at a turning point. There are several main actors in this debate. With the risk of stigmatising
the situation, let us say that there are those who wish:
▪ to keep the single market as strong as possible: the European Union members
▪ for a soft Brexit, in favour of close links between Britain and the EU: Theresa May, UK Prime Minister and leader of the Conservatives
▪ for a hard Brexit, in favour of a complete withdrawal of the United Kingdom from the EU: the Leave Means Leave platform and some Conservative party members
▪ for a new referendum: probably a majority of the Labour Party members
Since mid-May, the Swiss franc has appreciated by more than 6% against most of its counterparts. As a safe-haven, the Swiss currency has clearly benefited from the various international events that have prompted investors to adopt a risk-off approach. Resurgence of trade tensions, turmoil in emerging markets, fears about Italy’s solvency, the possibility of a no-deal Brexit: all these factors have pushed the Swiss franc to appreciate. The EUR/CHF exchange 2 rate, which was around 1.20 in April, is currently just above 1.12, a level that traders had not seen since the summer of 2017.
Growth in the main developed countries was good to excellent in the first half of 2018, most of them above their growth potential. Australia, Sweden and Switzerland, in particular, have recorded an annual growth rate of over 3% in Gross Domestic Product. The United States is not far behind with 2.9%. In Canada and the Euro Area, economic activity managed to remain above 2.0%. Only the United-Kingdom, which is struggling with Brexit, and Japan, which is still fighting against deflation, have a growth rate of less than 1.5%. Nevertheless, even these lower figures are still not in the red.
We recently highlighted the fact that US stock market indices are doing much better than their European counterparts and that this trend had no reason to reverse (cf. WIF of 2 July 2018). The performances of the last two months reinforce this scenario. Compared to the world’s leading financial markets, New York once again stands out as the big winner. The S&P 500 climbs +7.2%. In comparison, Zurich (+5.6%), Paris (+4.0%), Berlin (+3.8%) and Tokyo (+2.7%) are growing less rapidly. Madrid, London and Hong Kong are down slightly. As for Milan (-3.9%), Shanghai (-4.0%) and Shenzhen (-9.8%): these have taken a tumble.
Brexit continues to dominate politics in the United Kingdom and darken the prospects for the pound. As a reminder, on 30 March 2019, at the first hour, the United Kingdom will leave the European Union. To ensure that everything runs smoothly, the practical arrangements for divorce should be defined before the end of 2018, ideally before the European Council meeting on October 18 (see chart 2). Failure of negotiations can take place at two levels: if London and Brussels fail to reach an agreement or if the House of Commons does not approve the deal negotiated by the British Prime Minister. During the summer, the risk of a “no-deal” Brexit has clearly increased.
Global equity markets have remained reasonably resilient to the Turkish crisis. The MSCI World dropped only -1.8% since August 9 last week, while the MSCI United States continues to hover around all-time highs! The disconnection between the US equity market and the rest of the world is currently huge. Since, as we know, a picture is worth a thousand words, let’s have a look at the year-to-date total return of the MSCI All Country World index versus the MSCI All Country World ex-US Index.
As Fed Chairman, Jerome Powell, said a few weeks ago, “the main takeaway is that the economy is doing very well. Most people who want to find jobs are finding them”. For his part, ECB Chairman, Mario Draghi, explained that “underlying economic fundamentals remain solid”. According to our own econometric analyses, growth will remain well above potential this year (2.8% in the US and 2.3% in the EMU), before slowing to level out in 2019 (2.0% and 1.7% respectively) and probably going below potential later.
Investors are looking forward to the moment when they can again overweight the European banking sector in order to benefit from a catching-up effect. This is understandable because, over the past 10 years, listed banks’ shares have consistently underperformed. In fact, they have never fully recovered from the subprime and the European debt crises. 2018 does not escape this sluggishness as the sector is once again having the worst performing year to date, recording a sharp drop of 16%, against a market that is globally on the edge.