Tricky time for investors

Competing forces: The divergence between the US and Europe plus Japan deepens.
For over 12 months there has been increasing evidence that the US economy is on a self-sustained recovery, with healthy growth rates and declining unemployment. In the September quarter GDP grew 1.0% (3.9% annualised, as it is the custom to report in the US) and the unemployment rate fell to 5.8%.

Meanwhile growth in the core European countries ranged from -0.1% in Italy to 0.3% in France. Since the GFC the US has worked through oversupply in the housing market and their financial institutions are in more or less decent shape. Households are more confident, due to a greater sense of job security and the effects of seeing their savings rise in value as equity markets have performed. Much of this has been facilitated by policy action from the Federal Reserve.

Conversely, in Europe growth remains weak. Eurozone unemployment, at 11.5%, has barely improved and confidence is poor. Inflation, at 0.3%, is well below the 2% target level and deflation is a real threat. The ECB managed to overcome the risks posed by Greece in 2011/12, but their limited toolbox, combined with a lack of unity amongst Euro members, has meant a convincing policy solution is still wanting.

In November German 10 year bond yields reached a new low at 0.70%. French, Dutch, Spanish, Italian and Swiss 10 year bond yields all made record lows. In Japan, 10 year yields fell to 0.42%. The gap between US and German 10 year yields is at the highest in some time. (see Chart 2)