This week's thought-provokers for investors

Weekly Economic Wrap-up

Zürich, (PresseBox) - Capital markets moved sideways for another week. The markets fell slightly ahead of the annual meeting of the central banks in Jackson Hole. The interest rate of US and German bonds remained low. 10-year bond yields for European peripheral countries were still at high levels - the Spanish bond yield hit 6.5% and its Italian counterpart 5.7%. Portuguese bond yields fell to 9% due to the government's reform steps. Commodity markets (measured by the Rogers International Commodity Index) are waiting for new impulses. Gold is trading at USD1660/oz and crude oil at USD95/bbl. The EUR/USD exchange rate is at 1.25.

The German Ifo Business Climate Index fell to 102.3 from 103.2 in July. The figures dropped for the fourth month in a row, underpinning the slowing German growth trend. Companies expressed greater pessimism regarding future business development. Business climate in manufacturing was positive, but deteriorated in the retail and wholesale sector. Retailers were concerned about both the current and future situation. German second-quarter growth fell to 0.3% from 0.5% in the first quarter.

German growth is slowing down, driven by the continued European uncertainty. The latest data points once again towards a looming recession in Europe.

In Germany, the number of unemployed people increased by 29,000 in August. However, the adjusted jobless rate was at 6.8%, unchanged since last December. According to Fran-Juergen Weise, the president of the Federal Labour Agency, the increase is normal for a holiday month, but this time it was bigger than usual.

It seems that the growing uncertainty in Europe is also taking its toll on Germany. Companies are delaying hiring as they fear a drop in demand for their goods and this leads to less demand by local consumers. If this downward spiral continues, the main European motor for growth will be at risk.

The Spanish gross domestic product (GDP) fell by 0.4% in the second quarter of 2012. This is in line with economist expectations. Consumer spending, investing and government spending declined, whereas exports of goods rose by 1.6%. Spain, the fifth largest economy in Europe, is entering into its second recession within three years. The latest data shows that the recession is deeper than expected. All necessary reforms to improve the longer-term outlook will, however, make the recession even worse.

The Economic Sentiment Indicator for Europe dropped from 87.9 to 86.1 in August. This is more than economists expected and marks the lowest value of the last three years for Europe as a whole. The survey shows falls in sentiment in the consumer, services and manufacturing sectors. The sentiment indicators are pointing towards a broader European recession, driven by lower domestic demand and a slowdown in exports. Pressure is rising on the European Central Bank to take action as the fiscal austerity will only make the situation worse.

The US economy expanded more than previously estimated in the second quarter, growing by 1.7%. Stronger consumption growth and a lower-than-expected reduction of government spending were the main drivers. However, the continuing deterioration of the economic conditions cannot be ignored, despite the upward revision. The struggling economy is increasing the odds of further central bank interventions.

US personal income increased by 0.3% m/m and personal consumption rose by 0.4% m/m in July, according to the Bureau of Economic Analysis. The consumption figure marks the sharpest increase in the last five months. Real income was up by 0.3% from June.

Real income growth rose by 2.0% y/y in July. The changes in real income are helping to improve consumer sentiment. This is visible in the increase of real consumption. American consumers are increasing their spending, but it will not be enough to compensate for the slowdown in Europe and the emerging markets.

The S&P/Case-Shiller Index grew by 0.5% on the year in June. In the second quarter it was up 1.2% y/y. The index measures price changes in the 20 major metropolitan markets in the US. 13 out of 20 cities showed increases year-onyear.

The US housing market has probably reached its low point, driven by the loose monetary policy. This could signal the final turnaround for the real estate market in the US and improve consumer sentiment.

Stefan Angele, Head Investment Management & Member of the Executive Board

Important legal information
The information in this document constitutes neither an offer nor investment advice. It is given for information purposes only. Opinions and assessments contained in this document may change and reflect the point of view of Swiss & Global Asset Management in the current economic environment. No liability is assumed for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The contents of this document or parts of it can only be used or quoted with the indication of the source. Swiss & Global Asset Management is not a member of the Julius Baer Group.

GAM AG

Swiss & Global Asset Management is one of the leading dedicated asset managers in Switzerland and worldwide. At the end of June 2012, Swiss & Global had client assets under management totalling CHF 82.6 billion and employed around 300 staff. The company offers a comprehensive range of investment funds, tailored solutions for institutional clients and customised private labelling services.

Swiss & Global Asset Management is a unique combination of Swiss roots - in the form of long-standing client relationships and strong quality awareness - and a network that spans the globe, with more than 1,000 distribution contracts in some 30 countries.

Swiss & Global Asset Management is the exclusive manager of Julius Baer funds. Swiss & Global is a company of the GAM Holding, which is listed on the SIX Swiss Exchange.

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