Market Insights – September 3rd, 2018

Weekly financial & economic analysis.

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Wall street sign in the foreground and a huge blurred building in the background in Manhattan, New York, USA.


The Argentine peso tumbled almost 20% in a week, even though the benchmark interest rate was raised from 45% to 60% to try and halt the depreciation. The peso had been relatively stable since May, but news that Argentina had asked the IMF to speed up the release of its bailout package spooked the markets and added to the volatility on emerging currencies. Rating agency Fitch lowered its outlook on Italian sovereign debt from stable to negative. This suggests that Italy’s BBB rating could soon be downgraded if the populist government fails to meet its budget commitments to its European partners. Last week, the US consumer confidence index reached an 18-year high, in a clear sign of the country’s solid economic situation. This is good news as we head towards the end of the year, a period buoyed by consumer spending, which accounts for almost 80% of US GDP.

There's the USA, then there's everyone else

Leading financial-market indicators in the USA are telling a very different story from those in other areas of the world. The USA appears to be in a league of its own. How can it be that Wall Street is reaching record highs when most other global stock markets are far from their peaks? Why is it that US interest rates are practically the only ones heading upwards at a time when rates are linger-ing at rock bottom or in negative territory everywhere else? And why is the green-back holding up so well despite the expansion in the US external deficits, while not a week goes by without an emerging-market currency – like the Argentine peso last week – or another peripheral currency – like the Australian dollar – tumbling? It’s true that the US economy is riding high, with unemployment at its lowest in dec-ades and business and consumer confi-dence soaring. But the rest of the world is not faring so poorly either. Of course Europe only recently returned to growth, Japan is struggling to put its long-term disinflation well and truly behind it, and emerging markets are still more eco-nomically volatile than developed coun-tries. But overall the world is doing much better than it was a few years ago, alt-hough that trend seems to be reflected only in US assets. Perhaps it’s all about US monetary policy – the only one that’s close to being back to normal and that has managed to attract a growing num-ber of global savers in search of higher returns IT would make sense that once the taxboost provided by the Trump administration this year is out of the way, the USA will start feeling the effects of an overly strong dollar, which could prompt the Fed to slow down its mone-tary tightening – or even hold it off for a while. That would, in theory, at last shrink the gap with other financial markets around the world. European yields would be able to narrow the spread with US yields, which would give the euro a boost. And global stock markets, which have lagged far behind in terms of their cumulative performance in recent years, would be able to catch up. That is, unless these disparities reflect long-term polit-ical manoeuvring by the USA or obscure a deeper ill.

Is the waiting game over in Europe?

While the US stock market continues to be pushed to new highs by a soaring tech sector, the other global market indexes are struggling, especially those in Europe. There are several reasons for this underperformance. While it’s true that the tech sector is much less pre-dominant on European stock markets, the main factor is probably the renewed political uncertainty both outside the region – such as protectionist fears and the crisis in Turkey – and inside – such as Brexit and the risk of fiscal frenzy in Italy. Investors are extremely bearish about European markets, even though the eurozone economy is doing well and the European Central Bank will soon begin normalising its monetary policy. Going against the consensus, we remain bull-ish on the region’s stock markets and think that the stage is set for a rebound. Earnings have been revised upwards, and fund flows have stabilised following the massive outflows. But what’s really caught our attention is that the euro-zone’s economic news index has risen sharply and is now above that of the USA. Given that growth has no doubt peaked in the USA and Europe is lagging behind, this trend could continue, providing a boost to eurozone stock markets. For the moment, we recom-mend Siemens, Accor, Royal Dutch and ASML. Once the markets turn their atten-tion back to the ECB’s reduced asset purchases, value stocks – such as auto-mobiles and banks – should bounce back.


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