In the United States, the Eurozone, Japan and China, economic growth continues to be robust.
All the main regions are currently contributing to the growth of the global economy. In the United States, GDP rose at an annualised rate of 3% in the third quarter against the previous quarter, mainly due to an increase in inventories and improvement in the trade balance. In the eurozone, the economy continues to be robust and the political risks are confined to expectations for the Italian elections early next year.
In Japan, Shinzo Abe’s landslide victory in the early elections indicates that the country will continue with its extremely expansionary monetary and fiscal policy. And President Xi Jinping’s strengthened authority, after his name was written into the Communist Party’s constitution at the 19th National Congress, should ensure the continuation of the Chinese economy’s robust growth.
Most equity market indices remained positive in October
In October, equity markets continued to make very steady progress with little volatility, sustained by the publication of encouraging economic news and good corporate results. Guy Wagner: “The main negative element is the high level of equity market valuations. Although these considerably reduce the potential for long-term returns from equities, they have rarely been a reliable indication of an imminent correction.”
ECB: scaling back of its quantitative easing programme
As expected, the European Central Bank (ECB) announced the scaling back of its quantitative easing programme from January 2018. The monthly volume of asset purchases will be reduced from the present level of 60 billion euros to 30 billion euros next year. The asset purchase programme will continue at least until September 2018, and may be extended after that date. ECB President Mario Draghi also restated that the ECB’s key interest rates will remain at their current levels for an extended period, and well past the horizon of the net asset purchases. “European interest rates are therefore unlikely to increase before 2019”, thinks the Luxembourgish economist. In the United States, the monetary authorities left their headline rates unchanged at their meeting at the beginning of November. The appointment of Jerome Powell to succeed Janet Yellen as Chairman of the Federal Reserve from February 2018 suggests that its monetary policy will continue to be relatively non-restrictive in the coming years.
Bond markets still hold little appeal
In the eurozone, bond yields fell slightly. Mario Draghi’s refusal to commit to a precise date for a definitive end to the quantitative easing programme boosted European bond markets at the end of the month. The 10-year government bond yield dipped in Germany, in Italy, and in Spain. In the United States, long-term yields gained slightly on news of progress in the Trump administration’s tax reforms. “Generally speaking, the bond markets still hold little appeal.”
Euro weaker in October
Following the euro’s strong showing since the start of the year, it gave up ground in October. Uncertainty over the definitive end to the ECB’s quantitative easing programme weighed on the euro, dropping back against the dollar from 1.18 to 1.16 over the month. “Progress on tax reform in the United States seems to be a necessary condition for the dollar to continue appreciating in the coming weeks”, concludes Guy Wagner.
Guy Wagner, chief investment officer at BLI – Banque de Luxembourg Investments