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The past month was marked by a sharp sell-off in European rates as Bunds experienced one of the strongest corrections on record. Underlying the move was a repricing of the impact of ECB QE and a rise of inflation expectations, both underpinned by an improving macro backdrop in the Eurozone. Assets outside Europe were less affected, but the sell-off may just have been a precursor of future market tremors. The current fiscal, regulatory and monetary policy mix, while successful in avoiding excessive leverage, raises the risk of significant supply / demand mismatches and recurring spikes in market volatility. The global recovery continues to somewhat disappoint. Although growth momentum is no longer slowing, concerns remain. Europe stands out as the undeniable positive story. However, after upward revisions at the beginning of the year, recent data have been weakening and scope for further upside surprises is now limited. In the US, data have continued to underwhelm, but robust fundamentals should be reflected in stronger growth over coming quarters. In China, fiscal stimulus will now add to monetary easing, providing a boost to growth. A Fed hike is still very much on the table in 2015; our base case is a first hike in September, given a robust labour market and an improving inflation picture. Any action remains data dependent, however. Rates markets appear to be mispricing the path of monetary policy, with core rates in Europe now above pre-QE levels and US rates pricing in too gradual a hiking cycle. In equities, upside in Europe seems now limited while a pullback in the US appears likely; we see more opportunities in stock-picking than in broad indices. Implied volatility in equity markets looks low relative to other asset classes, though this is not infrequent. We expect volatility spikes to continue to be short-lived. The environment remains supportive for credit and spreads are not particularly tight; we favour high-yield, given lower duration risk and higher y [more]
Concern over global growth momentum prevails. Weakness in the US has extended into Q2, raising worries that the soft patch may be deeper-rooted than initially expected. We view the slowdown as temporary, but it may prove enough to further lower growth expectations for the year. Weak data in China have also continued, and EM more broadly are struggling to gain traction. News is not all negative. China’s policy easing should support short-term growth and provide upside to current forecasts, even if this marks a potential return to investment- and export-led growth which could have repercussions for the global economy. In Russia, the recent rise in oil prices coupled with the stabilisation of the Ukraine crisis should limit the depth of the recession. Lastly, the European recovery remains strong. The April FOMC meeting has long been seen as a “wait and see” event. We expect the Fed to leave the door open for hikes from June if data improve, though there remains a risk of a more dovish tone which could even raise doubts about any hikes this year. In Europe, the ECB has reiterated its commitment to the QE programme and we see no reason for it to change tack even as the recovery accelerates and if the euro falls below parity. Market fall-out from European politics has been muted so far, even though event risk is rising. There has been little progress in Greece and pressure is rising, although we continue to expect Grexit to be avoided. The UK election is looming and the outcome is uncertain, but we expect the macro outlook to remain relatively stable. European equities continue to be the preferred long, with further upside in the short term. This contrasts with the US, where the risk of a pullback has increased. In FX, dollar strength and euro weakness remain the key stories for the year. In rates, US market pricing remains too conservative, but a significant repricing is unlikely until data improve materially. EM assets have benefitted from a respite as Fed hike expecta [more]
Global growth dynamics have shifted over recent months. The Eurozone has surprised to the upside, as domestic demand has benefitted from lower oil prices and an improving credit picture. In contrast, US macro data have continued to disappoint, with sub-2% growth likely in Q1 – although we see this weakness as temporary and expect 2015 growth around 3%. EM economies remain weak; China in particular continues to slow down gradually and we see a rising risk of sub-6% growth for a couple of quarters this year. Monetary policy remains supportive, with the wave of central bank rate cuts continuing across EM and some DM. However, developments at the ECB and the Fed continue to be the key areas of focus. The ECB has confirmed its strong commitment to its asset purchase programme and has started aggressively buying sovereign debt. Meanwhile, a more dovish than expected Fed has kept 2015 rate increases on the table but signalled that September, not June, is the likely start of its hiking cycle. Risk assets have performed strongly YTD, even in dollar terms. The ECB and the Fed will remain key drivers of performance in the coming months. ECB QE will continue supporting European assets, pushing equities higher and peripheral spreads tighter. Meanwhile, a cautious Fed will provide temporary support to EM assets, but volatility will gradually rise as we finally approach Fed hikes. In Europe, negotiations with Greece have stalled since the 20-February agreement. We still expect a compromise and no Grexit. But as liquidity for banks and the government dries out the risk of capital controls continues to rise. Uncertainty will remain high, though the risk of contagion is now much lower than in 2010-12. The situation in Greece, just like the rise of Podemos in Spain or the Front National in France, highlight political risk in Europe. In a special report we take a closer look at the upcoming UK general election and why it matters for the UK and for the European Union. The election [more]
Greece is once again on centre stage. Tense negotiations between the new Radical-Left led coalition government and the country’s official creditors have dominated recent headlines. Despite heated rhetoric from both sides, Greece’s request for an extension of the original bailout arrangement marks a first step in what we expect will be a long road to an eventual compromise that keeps the country in the Eurozone. We explore this in more detail in this month's special report. Global growth momentum has eased in recent months. The risk has risen of China growth falling below 6% for 1-2 quarters. US data have been mixed but still point to trend growth above 3%, though Q1 could be weaker. The Eurozone is the positive exception, however, with stronger-than-expected growth on improving credit conditions, a weaker euro and cheap oil. The low inflation environment has provided scope for central banks across the globe to support growth. So far this year, 17 central banks have eased monetary policy. Most significantly, the ECB finally announced a bold public QE programme, exceeding expectations on both the size and the pace of purchases. In contrast, strong US labour market and wage inflation data have placed Fed hikes firmly back on the table for 2015. This divergence and the often unexpected nature of recent central bank policy decisions, notably in Switzerland, have contributed to a pick up volatility in FX and Rates. Nevertheless, returns have been broadly positive across asset classes, with European stocks outperforming amid the backdrop of ECB QE. Overall, the combination of moderate growth and still-easy monetary policy should be supportive for risk appetite. Greece, China and to a lesser extent Russia are the key risks. Greek exit risk will linger for several months. If it were to happen, the consequences would be negative for both sides and for markets, though contagion would be more limited than in 2010-12 as the Eurozone is stronger and better equipped to deal with [more]
The global economy will gather pace in 2015. Above trend expansion in the US will far outpace the weak and uneven acceleration in Europe, while growth in China will be slower but still high. Although global growth has fallen short of expectations since 2011, more optimism is warranted in 2015 as economic drags from recent years fade. Peak fiscal tightening in the US and the Eurozone is behind us, bank lending in Europe has stopped contracting, and the collapse in oil prices will effectively provide a tax cut for consumers across the globe In the near term, cheap oil adds to deflationary pressures, enabling central banks to maintain their ultra supportive stance. However, the divergent global growth dynamics will be mirrored in central bank policy. Persistent concerns over low inflation in the Eurozone and Japan will see the ECB and BoJ continue to ease policy, with the ECB pursuing public QE. In contrast, the Fed, buoyed by a strengthening economy and rising wages, will raise rates. Monetary policy will however remain accommodative, with rates remaining low relative to previous cycles Central bank divergence will underpin further USD strength. Equities remain our preferred asset class. However, with valuations having fully corrected from depressed post-crisis levels, sector allocation and stock picking will be crucial to investment performance. Returns in Credit will be low, however Europe should outperform the US on the back of ECB support and lower exposure to Energy. Core sovereign bond yields should rise moderately over the year, although even lower rates are possible in the near term. We see limited further downside for Oil, but any price recovery will be gradual Key risks to our view include an escalation of the crisis in Europe such as the rise of anti-establishment parties, a more pronounced slowdown in China, a series of crises across EM and less predictable risks such as natural disasters or rising geopolitical tensions David Folkerts-Landau, Group [more]