August delivered a relatively good performance: despite the resurgence of geopolitical tensions and worrying health and economic news, the remarkable performances of global stock markets in August (+5,17% in euro) were in sharp contrast with the calm that normally prevails at this time of year.
The Covid-19 epidemic appears to be under control in Europe although fears regarding a new wave vary from one country to another. In this environment, the strong and coordinated responses of the public authorities continue to reassure investors and in particular with regard to the eurozone. The single currency continued to strengthen against the US dollar during August.
In the United States, the virus continues to be more virulent: at end-August, the country recorded 6 million cases and 185.000 deaths. Consequently, the Federal Reserve’s (Fed) efforts to support the financial markets remain crucial. Some estimates indicate that it is currently injecting nearly USD 5 billion per day into the financial system with a balance sheet close to USD 7 trillion.
The Federal Reserve’s (Fed) efforts to support the financial markets remain crucial. Some estimates indicate that it is currently injecting nearly USD 5 billion per day into the financial system with a balance sheet close to USD 7 trillion.
Moreover, the Fed drove the point home at the Jackson Hole symposium, by making a change to its objective of price stability. During this event, Jerome Powell revealed that in the future the Fed would focus more on an average inflation target of 2%. Previously, it was targeting inflation of 2%.
This means that the institution is now authorising this figure being temporarily exceeded, without however the institution being constrained to alter its key rates. In practice, this means that rates will remain at low levels for longer because even if inflation breaches the 2% threshold, the Fed is unlikely to immediately raise its key rates.
On the fiscal front, the initial measures were as rapid and spectacular as those of the Fed. However, some of this aid, such as the USD 600 paid to the unemployed by the federal government, expired at the end of July. While discussions on a second salvo of measures have taken place between the White House and the US Congress, the two parties are struggling to reach agreement on the new measures to be implemented as well as the amount involved. Moreover, the fast-approaching US presidential election is unlikely to facilitate these negotiations.
However, the absence of new fiscal measures could weaken an economic recovery suffering from a drop in the household consumption trend and a decline in companies’ production conditions. We continue to favour an underweight stance on equities in our overall allocation due to the ongoing fragile economic recovery and high equity market valuations.
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