The US’s market dominance seems to be a thing of the past for now. The biggest climbers of the early year have come from Europe, whose growth has been further boosted by Germany’s U-turn in its fiscal policy.
The last few weeks have been eventful in the markets. In the US, stocks fell last week after a challenging week, and the rapid weakening of the dollar highlighted the distress of euro investors. In Europe, the bullish sentiment has calmed down somewhat, but especially in Germany, the mood is still quite positive.
It was also a dizzying week in the currency and fixed income markets. German long-term interest rates shot up on the back of fiscal policy changes; the country’s 10-year bond yield peaked last week to its highest level since the fall of the Berlin Wall. The higher yields contributed to the euro’s sharp rise against the dollar. The last time the euro strengthened by this much in a week was during the global financial crisis.
In recent years, the United States has excelled in comparison to other market areas. The year started with the idea that the same theme would continue, but that no longer seems to be the case.
The narrative of unwavering US economic growth is being tested as consumer and industrial confidence figures, housing market data and employment figures have clearly weakened in recent weeks. The number of layoffs in the United States spiked, while the growth expectations forecasted by the Atlanta Fed GDPNow model, for example, have fallen sharply over the past couple of weeks. So far, there are few concrete signs of an economic slowdown, but signs of economic challenges have increased significantly.
At the same time, uncertainty created by the political system is growing, and US government layoffs, among other things, are not yet reflected in the data. Uncertainty may, however, also lead to positive surprises, for example, as regards tax policy.
The market perspective on the European economic outlook has also changed significantly since the turn of the year. Germany witnessed a complete turnaround in economic policy after the elections, as the new government announced that it will clearly change its take on economic policy.
Germany has traditionally been moderate in its fiscal policy and has strived to avoid deficits. The new government will allow for significantly larger deficits than before, for example, to enable defence investments. Significant investments in infrastructure have also been planned.
As a result of the changes, German economic growth is expected to accelerate rapidly. Germany is one of the most significant players in the euro zone, so the country’s economic growth figures, if realised, could also have a significant impact on the entire euro zone.
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