As expected, the central banks of Japan, the eurozone and Sweden all left their key interest rates unchanged . …
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By Marilyn Watson Head of Global Fundamental Fixed Income Strategy and by Global Bond Team
The Swedish Riksbank kept the repo rate at -0.5% but, in a split vote, extended its asset purchase programme by SEK 15 billion for the second half of 2017. They noted that this extension of government bond purchases is to “support the upturn in inflation” in the accompanying statement. They also commented that “considerable uncertainty over economic and political developments abroad is also important for the stance of monetary policy”. We are long the Swedish krona based on improving economic fundamentals.
The Bank of Japan maintained its current yield curve control and asset purchase policies. It marginally revised down the inflation forecast for fiscal year 2017 to 1.4% (from 1.5%) while increasing growth forecasts for fiscal years 2017 and 2018 (to 1.6% and 1.3% respectively)1. We are positioned with a steepener on the long end of the JGB curve.
The European Central Bank kept its monetary policy stance firmly unchanged. Nevertheless, overall, recent economic data releases from the eurozone have continued to improve. During the press conference, President Mario Draghi noted that downside risks to economic growth have further diminished. However, as usual, he repeated his view that individual governments should press on with structural reforms. Given the currency bloc’s improving fundamental backdrop and the global reflationary environment, we believe that the ECB will fully taper its asset purchase programme next year.
Many bond investors focused on the political risk around the French presidential election over the past few weeks. The first round took place on Sunday (23rd April), with Emmanuel Macron and Marine Le Pen progressing to the final round on 7th May. General elections will subsequently take place in June.
While cognisant that the market is pricing in a relatively low probability of an eventual Le Pen victory, a win would have enormous ramifications for the euro, the eurozone and the European Union.
Another general election will now also take place in the UK on 8th June, news that was taken positively by the market, particularly the British pound. We currently favour certain British banks based on fundamentals, in particular subordinated debt, as well as select securitised assets.
Finally, elsewhere in Europe we have a range of diversified positions, including short duration positions in Hungary, the Czech Republic and Poland, a steepener in German rates and a long position in Italian inflation-linked bonds.