At its most recent meeting, the ECB talked of cutting rates and re-launching the quantitative asset purchase programme, and this has pushed bond yields into negative territory. The tiering system, which is a way of softening the impact of negative interest rates on banks’ surplus deposits, will relieve pressure on the income statements of the major European banks. With the results publication season in full swing, the markets did not appear to be surprised by these measures, focussing as they undoubtedly were on the announcement of results and potential financial transactions (Osram, Grandvision, Cobham, Coface, etc.). Reactions to profit warnings varied somewhat.
In the automotive sector, investor forecasts were bleak, although the challenges faced by all cyclical sectors should not be overlooked. Consequently, the publications were rather welcomed (Faurecia, Plastic Omnium, etc.). The pattern of the markets is not changing much in the second half-year.
Although weakened, global growth is holding out. The manufacturing sector is paying the price of the trade war. Businesses are still able to create value or offer generous dividends. Equities remain one of the few real assets to which investors can still more or less add value, despite a monetary policy that has become too accommodating. In fact, Super Mario will have, right to the very end, pursued one single policy: saving the euro (and that is no small feat), and also enabling poorer States to obtain funding at very low cost (and that is financial pigheadedness). His actions will not make it possible to really revitalise the economy, much less promote a resurgence of wage inflation. He will be handing over to Christine Lagarde a monetary area that has been saved, for sure, but one that is close to Japanisation: with an ageing population, weak growth and real long-term rates that are persistently negative. He has never been anything but confident that his policy is correct. It was a great strength at the time of the eurozone crisis in 2011, but it has now become a weakness because, as the great German philosopher Nietzsche wrote, “It is not doubt that drives you mad, but certainty…”.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in July 26th, 2019.
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