This was not due to a lack of economic news:
- France’s President Macron continued to embrace reforms as France’s four main railways went on strike against them.
- Wages in Germany increased more than usual with public sector workers being promised 3% per year for the next two years and metalworkers getting a 4.3% increase this year.
- Italy, Europe’s third largest economy, had a difficult time forming a government as populist factions gained more ground. There was some talk, later squelched, that Italy could leave the EU.
- A 6.1 magnitude earthquake rocked an industrial area in Japan, interrupting production at a number of plants.
- Germany’s Merkel met with France’s Macron and agreed to have a common Eurozone budget by 2021.
The mixed news led to mixed market results, although international developed economies also generally continued their upward trajectories. (Note that most of these markets were up in local currency terms, but our returns in them suffered from a very strong U.S. dollar.) The European Community Bank (ECB) announced that Europe was doing well enough that it would reduce bond purchases in October and stop them completely at the end of the year. However, Europe was not doing well enough to meet its target inflation rate of 2%, coming in at only 1.2% in April. The ECB also said that they would hold their current low-interest rate regime through at least the summer of 2019.
For the quarter, International Developed markets did slightly better than in Q1 (when they were down about 2% compared with Q2’s down of 0.75%). It is important to keep the recent performance in perspective, comparing it to last year when these markets were up 25%. Also, as tariffs and trade continue to dominate much of the financial news, it may be necessary to keep in perspective the U.S. relationship with its developed market counterparts.
At the beginning of the quarter when President Trump’s trade rhetoric began to increase, he met with European leaders and then decided to delay his decisions about new tariffs with them. In 2016 (the latest year with reliable data), the U.S. exported about $270 billion of goods to Europe who is our largest trading partner (followed closely by Canada, to whom we exported $266 billion of goods in 2016). As we mentioned last quarter, our President likes to open negotiations with bluster. Where that bluster leads is most likely going to be tempered by the harsh reality of a world that continually competes across borders in a complex web of traded goods and services.