Enthusiasm Wanes

The macro point

At the beginning of the year, everything seemed to be going well for the eurozone. Concerns about Trump's protectionist policy and its uncertain effects on the economy led investors to favor European stocks over American ones. As a result, this supported the euro, which became, in the eyes of some investors, a safe haven. Some even dreamed that European growth might outperform that of the United States. Unfortunately, all good things come to an end.

European statistics are mediocre. In April, industrial production in France collapsed by 1.4% over a month. It's even worse in Germany. Industrial production is down 2% year-on-year, and exports in April plummeted by 1.7%—a huge problem for an economy very dependent on international trade. Overlooked, business bankruptcies in France are now at their highest level since 1991, according to the Bank of France. One might think the situation is so bad that it can only get better. It's not true. The worst is yet to come.

Faced with the trade war, China is seeking new markets. And there is one market that is poorly protected, and that's Europe. China's trade balance statistics in May are unequivocal. Chinese exports to the United States fell by 34% (Trump effect) while they increased by 12% to the EU, 21% to Germany, 24% to France, and 7% to the Netherlands. Our companies, which are already struggling due to the slowdown in domestic demand, will also have to face unfair competition from China to an unprecedented extent. Chinese companies will massively dump their surpluses and low-cost products in Europe, which will certainly increase the number of business bankruptcies on the continent. It will be very complicated in the second half of the year.

Across the Channel, signs of a slowdown are becoming more noticeable, which could prompt—if not immediately, but in the coming months—the Bank of England to intervene. Job creation has been slowing for several months in the private sector. This now also applies to the public sector. Take health, for example; job creation is at its lowest level since November 2021. Soon, this will lead to a general decline in activity, prices, and also wages. Again, growth might start to falter in the second half of the year.

Ultimately, it's only in the United States that the dynamic remains generally positive. The employment figures in May do not confirm the recession scenario that was feared after "Liberation Day," but rather an economic slowdown that is not overly concerning. In January, the unemployment rate was 4.011%. It gradually increased to 4.244%. Importantly, job creation was revised downward for March and April, to 147,000 and 120,000, respectively. This makes a three-month average of 135,000. It's still very good.

We anticipate that American growth should reach 1.5-1.7% in 2025 compared to probably 0.9% in the eurozone. The match is over.

Technical point

In the currency market, the euro is on the rise – which shows that macroeconomics isn't the most crucial factor explaining exchange rate movements. An economy can lag with a rising currency. After emerging from its consolidation phase around 1.14, EUR/USD is on track to reach our target of 1.17. EUR/GBP, EUR/JPY, EUR/CHF, and to a lesser extent, EUR/CAD, are also in an upward phase. We do not rule out the EUR/GBP pair reaching 0.86 by the end of the year – which would imply an increase of over 100 pips. As for EUR/JPY, expect profit-taking around the resistance at 166.09, a six-month high.

Announcements to follow

This week, the focus won't be on the Federal Reserve (Fed), Bank of Japan (BoJ), and Bank of England (BoE). The Fed is on pause until September, the BoJ should raise its benchmark rate in July if all goes well, while the BoE might only cut rates in August.

The Swiss National Bank (SNB) will attract all the attention for two reasons. It will set its benchmark rate at 0% - unprecedented for developed countries. It's a much lower rate than the ECB's (currently at 2%) even though both central banks normally follow a similar monetary policy. More importantly, the SNB might open the door to a further rate cut in the fall, particularly to weaken the franc. This would mark the return of negative rates, a financial anomaly thought to be behind us. If negative rates indeed return, it could weaken the Swiss banking sector. We doubt other central banks will follow the Swiss example. However, it's anything but trivial. What long-term effect on the franc's exchange rate? Many studies show that negative rates theoretically weaken the currency. In practice, it's more complicated, especially for a safe-haven currency like the franc. Other factors, often more significant, such as risk aversion, must be considered.

The geopolitical situation in the Middle East should be watched. Things can escalate quickly. Caution.

The information provided in this publication is communicated for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an incentive to engage in any investment.