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In Europe, growth figures were surprisingly strong, with GDP for the eurozone as a whole rising by 0.7% quarter-on-quarter. The positive surprise came mainly from the southern European countries, benefiting from a strong rebound in tourism, while Germany, the industrial pillar of the eurozone, saw its activity stagnate, write Guy Wagner and his team in their latest monthly market report "Highlights".

The second quarter GDP figures confirm that global economic growth is losing momentum. In the United States, GDP fell by 0.9% at an annualized rate compared to the first three months of the year, recording a second consecutive quarter of decline. “This was mainly due to weaker government spending and real estate investment, while domestic consumption, the largest component of GDP, continued to grow,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “Given the current strength of the labour market, it is unlikely that the first half of 2022 will be officially classified as a recession, although the technical criterion of two consecutive quarters of GDP decline is now met.” In China, GDP grew by only 0.4% year-on-year due to strict containment measures, which have, however, since been lifted. In Japan, exports remain the most dynamic component of GDP, with the slowdown in global demand showing little impact so far. Overall, most activity indicators for the month of June were relatively weak in both manufacturing and services, suggesting a continued moderation in the pace of global economic growth going into the third quarter.

U.S. Federal Reserve raises key interest rate for second time in a row

In July, the Federal Reserve's monetary committee proceeded with its second consecutive 75 basis point increase as expected, taking the federal funds rate target range to 2.25% - 2.50%. Jerome Powell, the top U.S. monetary official, gave no new indication of future rate action. A further tightening of 50 basis points at the next meeting in September is currently the most likely scenario. In Europe, the central bank raised all three key rates by 50 basis points, ending the era of negative interest rates. The ECB's refinancing rate, which is its most important policy rate, now stands at 0.50%. Governing Council President Christine Lagarde also presented the new anti-fragmentation tool, which is designed to prevent too wide a spread in funding rates within the eurozone. “If such a spread were to occur, the ECB could intervene under certain conditions by purchasing without limit the bonds of the most pressured countries,” underlines the Luxembourgish economist.

Government bond yields fall sharply

On the bond markets, government bond yields fell sharply on both sides of the Atlantic due to the many signs of economic slowdown. Over the month of July, the benchmark 10-year yield fell in the United States, in Germany, in France, in Italy and in Spain.

Strong rebound of equity markets

After the historic decline in stock prices in the first half of the year, the equity markets rebounded strongly in July. “The publication of good corporate results by most of the heavyweights in the main stock market indices brought relief to investors, who became more inclined to take equity risks once again.” Thus, the MSCI All Country World Index Net Total Return registered its largest monthly increase since April 2020. Only the emerging countries did not participate in the rebound. “At the sector level, the best performances were achieved by technology and consumer discretionary stocks (including luxury goods in particular), which rebounded strongly from their first-half underperformance,” 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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