Although investor confidence was shaken in the second quarter by the punitive tariffs levied by the United States and by political developments in Italy, the global economy continued to grow at a solid pace.
In late May, the Trump administration decided to impose protective tariffs on Canada, China, the European Union and Mexico. It imposed tariffs of 25 percent on steel imports and ten percent on aluminum imports. U.S. President Trump justified these protectionist measures by saying they were necessary to ensure “national security”. In response, the targeted countries threatened to retaliate against the United States. The momentum of the U.S. economy was strong in spite of the trade war. The purchasing managers’ indexes showed still-upbeat business climate sentiment, and unemployment dropped to its lowest level since April 2000. Due to the strong economic activity and slow increase in the inflation rate, the Fed raised the prime rate to 1.75 to 2 percent and signaled that two more increases might be coming this year.
In the eurozone, Italy faced a political crisis after Sergio Mattarella, the Italian president, vetoed the coalition agreement between the 5 Star Movement and League because the parties had nominated a Eurosceptic to serve as the country’s finance minister. While the parties eventually managed to agree on a compromise candidate to serve as the finance minister, European equity markets came under pressure. Although the eurozone’s economic momentum began to sputter in the second quarter, various economic indicators continue to signal solid economic growth. In this environment, the European Central Bank (ECB) announced that it would begin tapering its securities purchases in the second half of the year. At the same time, however, it affirmed that it would wait over a year to increase interest rates.
Switzerland’s economic data continued to be stable even if some economic figures failed to return to the record highs of the first quarter. The manufacturing sector continued to experience a boom as the job market improved, which continued to feed the momentum in the domestic economy. As was to be expected, the Swiss National Bank (SNB) maintained its monetary policy stance at its quarterly meeting. The SNB emphasized once again that the Swiss franc was overvalued and that economic recovery depended on negative interest rates and on the bank intervening in the FX markets if needed. The Swiss franc rose in response to the political risks in Italy and concerns surrounding U.S. protectionism.
Portfolio return (second quarter)
The reporting quarter started out strong but suffered losses as it continued, ending with a small positive return of 0.13 percent.