A Look Back on the First Semester of 2014

June closes the first semester of 2014. The United States had increases of 7% to 8% in the S&P and Nasdaq indexes and with close to 2.5% in the Dow Jones. In Europe, the Madrid and Milan indexes with rises of 11% and 12%, and the London index without variations; In Asia, the indexes of Tokyo, Shanghai and Hong Kong show average lows of 2.5% and Singapore a raise of 2.5%. In South America, the Sao Paulo index rose 5%. The yields on Italian and Spanish sovereign bonds lowered from around 4% to a bit more than 2.5%, Germany’s bonds lowered their yield from close to 2% to 1.24%, and the American Treasury Bonds, which at the beginning of the year were yielding 3%, have maintained numbers closer to 2.5%. The US Dollar has maintained itself with variations of (+/-) 1% against the Euro, Swiss Franc and Yen; it has appreciated almost 9% against Brazil’s Real and 2.5% against China’s Yuan.

Until the beginning of the month it seemed that the European Central Bank (ECB) was going to continue its rather passive policy towards the lack of growth issue and the persistent stagnation of prices and wages, all this within a much reduced inflation, far away from the desirable “annual almost two percent,” unanimously agreed upon by academicians. But, moving away from this inertia, the ECB announced that beginning as of June 11, 2014, it would charge 0.1% for cash deposited in its vaults and that it would open a $400 billion credit line to encourage banks to give loans to families and businesses to refinance due accounts, and that it would take other regulatory measures intended to put liquidity in the markets in order to stimulate consumption, among these, giving impulse to the region’s Central Banks to acquire fixed yield papers, not necessarily those emitted by governments, but by the private sector, when they have the backing of fixed assets. The intention was to get the Euro to lose value to benefit the zone’s exports and to pass from an almost zero inflation (0.5% annualized until May 2014) to get to 1.4% in 2016. These are the monetary measures, designed to avoid deflation, the situation from which Japan has tried to come out of after almost twenty years and in which many European countries, like Greece, have fallen into, characterized by lack of consumer spending, price reduction, firing of personnel, unemployment, declining of tax collection, and this builds a vicious spiral in the economy which is very hard to revert.

On a more ample vision, we observe that this first semester closes with Europe still in transit in its precarious route towards its economic recuperation after the recession began in 2011. Even though the worst passed, as is announced by the majority of governments which celebrate the termination of the period of contracted economy, the truth is that many voices warn in the sense that Europe can still be in recession; that growth is very slow, that unemployment is still very high, that wages are not returning to the pre-crisis levels and the lack of confidence and social discontent are not diminishing, rather this last one showed up objectively in the results of the May European Parliament elections, in which the ultra-nationalist and populist of extreme right and/or were strengthened, a fact that shows rejection towards the leadership that was governing the continent when the crisis was generated. In this new political scenario the debate that questions the effectiveness of the rigid “austerity” measures were correct, or if they were actually the great impediment that blocked the return of recuperation and economic growth, has been reopened. Even within the German government, the leader of the austerity thesis for those countries that lost the compass and needed rescue measures, there are those who propose the need of giving emphasis to measure for development above said austerity, to achieve growth and move away from the risk of deflation. The internal forces of this debate have moved in the election of the new European Commission President, Jean-Claude Juncker, and it is possible that his election has been the result of a compromise to review these measures, among which there would be a higher flexibility in the rules to control fiscal deficits, which is something desired even by countries with major economies, like Italy and France. It remains to be seen if the application of a variant of the recipe allows for a more solid European recuperation.

The more or less generalized perception has been that in the United States the road towards recuperation was well-based. Nevertheless, the last indicators bring preoccupations. To get out of the crisis, the Fed implemented a double program of almost zero interest rates and the acquisition of Treasury bonds at a rate of $80 billion a month. A few months ago it was decided to diminish to end the acquisition of US bonds by the Fed in December of this year. The idea was to allow the economy to function normally once it gave signs of recuperation. But, unfortunately, the weaning off of the stimulus has not been accompanied by a sustained improvement in economic conditions. The revised numbers show a 1% contraction during the years’ first quarter, and it is expected that the first semesters’ numbers, which will be given in July, will be worse. Even though there are a couple of positive indicators, as is the employment rate and a moderate inflation, if it is confirmed that growth will be under 2% in 2014, the pessimism could affect the investors’ confidence. The predominant idea is that the Fed’s measures are exhausted. If demand on the part of the consumers has not risen enough, what is needed is that the Federal Government take the baton, even if it is through appropriation payments for unemployment benefits and support to local governments for the construction and repair of road systems. It also remains to be seen if these measures will be implemented in that country, a difficult thing since it’s a matter of ideological dispute between the Democratic and Republican parties.

In this state of the situation between Europe and the United States, it is possible that investments will look toward emerging countries and other coins besides the US dollar, where fixed income papers offer better benefits and shares could appreciate faster, but with less transparency and safety. It seems that the deceleration of growth in China will not be bigger. There will be enormous consumption in urban real estate construction, which will assure the flow of Latin American raw materials, as well as goods and services produced in the first world. In conclusion, there will not be any premonitions of a prompt bonanza nor risks of ominous events. As always, one must proceed with a watchful eye and attention to any signal that could indicate significant turns.

← Back to News Releases