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The risk of a second wave of infections and the explosion in public debt and deficit levels are all factors of uncertainty that could jeopardise the sustainability of the current recovery. This is the opinion of Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

After starting to improve in May, the global economic recovery gathered pace in June. Contrary to expectations, economic activity responded more favourably than expected to the easing of lockdown measures and government support programmes. In June, the composite purchasing managers' indices (measuring the level of activity in the services and manufacturing sectors) improved in all regions. “However, the strong month-on-month improvement in a number of economic statistics cannot conceal the fact that activity is still well down from pre-health-crisis levels”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments. “In addition, the expiration of some US public assistance programmes at the end of July, the risk of a second wave of infections, the cautious behaviour of a disconcerted populace leading to a general increase in the savings rate, and the explosion in public debt and deficit levels are all factors of uncertainty that could jeopardise the sustainability of the current recovery.”

ECB increased envelope for pandemic emergency purchase programme

After numerous monetary expansion measures during the last few months, there was no change to the US Federal Reserve’s policy in June. Following the FOMC meeting, Chairman Jerome Powell said that yield curve control was an additional monetary policy measure currently under consideration. As expected, at the beginning of June, the ECB increased the envelope for the pandemic emergency purchase programme (PEPP) by €600 billion, taking it to a total of €1,350 billion. The PEPP will run to at least the end of June 2021.

Calm bond markets in June

The bond markets were very calm in June. The yield on the US 10-year Treasury note was virtually unchanged. “Likewise, there was little movement in the eurozone core countries Germany and France. In the periphery countries, the ramping up of the ECB’s asset purchase programme led to a further slight reduction in financing costs in Italy and Spain.”

Equity markets rebound for the third month in a row

Equity markets rebounded for the third month in a row, clawing back most of the decline seen in the first quarter. “The stronger-than-expected improvement in economic activity and the central banks’ massive asset purchase programmes helped stock markets make gains despite the many pandemic-related uncertainties.” The MSCI All Country World Index Net Total Return expressed in euros gained 2.2% during the month, limiting its year-to-date decline to -6.3%. In the United States, the S&P 500 continued its spectacular rally, rebounding by 20% in the second quarter after its 20% slump in the first three months of the year. The Stoxx Europe 600 and the MSCI Emerging Markets rose in June, while the Topix in Japan fell slightly. “In terms of sectors, technology led the field once again, while the defensive consumer staples and healthcare sectors brought up the rear. The scale of the rebound has led to high equity valuations, reducing the potential for future returns and increasing the risk of a correction”, concludes Guy Wagner.

Guy Wagner, Chief Investment Officer

An economics graduate from the Université Libre de Bruxelles, Guy joined Banque de Luxembourg in 1986 where he was head of the Financial Analysis and Asset Management departments. He was appointed Chief Investment Officer of BLI – Banque de Luxembourg Investments in 2005.

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