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After bottoming out in April, the global economy is embarking on a cautious recovery as lockdown measures start to be eased. In May, the composite purchasing managers' indices (measuring the level of activity in the services and manufacturing sectors) improved in all regions, write Guy Wagner, Chief Investment Officer at BLI - Banque de Luxembourg Investments, and his team, in their monthly analysis, ‘Highlights’.

The composite index rose to 36.4 in the United States, to 30.5 in the eurozone and to 27.4 in Japan. “However, these indices are well below the 50 threshold which separates economic contraction from expansion”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI - Banque de Luxembourg Investments.

Equity markets continue their recovery

The bond markets were subdued in May. After their historic fall in the first quarter and rebound in April, equity markets continued to rally in May. “The fiscal and monetary authorities’ massive support measures, the general improvement in the health situation and the start of lifting lockdown measures boosted the equity markets despite the prospect of the deepest economic recession since the Second World War.” Despite the stock market rebound, there are huge divergences between sectors. Since the beginning of the year, technology (worldwide, expressed in EUR) has risen by 5.1% and healthcare by 3.4%, while finance has fallen by 25.9% and energy has lost as much as 34.3%.

Historic aid package in the eurozone

In the eurozone, the European Commission unveiled a €750 billion recovery plan, which, for the first time in European history, “provides for a transfer of funds from the North to the South to help the countries most affected by the pandemic”. In Japan, GDP growth in the first quarter was negative for the second time in a row, officially entering recession even before factoring in the ‘final blow' its economy was dealt in April. “China has abandoned setting a target for GDP growth for 2020, giving priority to financial prudence and stabilising employment, rather than economic growth at all costs”, says the Luxembourgish economist.

European monetary authorities are likely to further expand quantitative easing

Neither the US Federal Reserve nor the ECB held a meeting in May. In the United States, the Fed continued to increase the size of its balance sheet, although the pace of expansion was considerably slower than the previous month. In Europe, Germany’s constitutional court asked the ECB to carry out a ‘proportionality assessment’ of its purchases of government bonds and demonstrate in a substantial and understandable way that their economic and fiscal policy effects would not outweigh the monetary policy objectives. It threatened that the Bundesbank would no longer be allowed to participate in the execution of the programme unless the ECB does this within three months. Guy Wagner: “Despite this ruling, it seems highly likely that the ECB will further expand its quantitative easing measures.”

Guy Wagner
Managing Director of BLI – Banque de Luxembourg Investments
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