Comments on today’s ECB meeting and global fixed income themes from the Global Unconstrained Bond team …
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By Marilyn Watson Head of Global Fundamental Fixed Income Strategy
Politics, uncertainty and rhetoric have influenced bond and currency markets thus far in 2017. For example, President-Elect Donald Trump’s press conference last week, his comments this week on the US dollar and UK Prime Minister Theresa May’s first speech outlining her stance on Brexit, all triggered market fluctuations.
With elections in France, Germany and the Netherlands, the new US administration and Brexit negotiations, as well as a range of other risk events this year, uncertainty is something that we expect to continue for some time. Given the proliferation of headlines that we expect to see in coming months on the UK and the US in particular, this note will focus on our views in other areas of the world.
As expected, the ECB left key interest rates and its monetary policy stance unchanged today. President Draghi’s press conference was relatively uneventful, although he noted that there is no convincing upward trend in underlying inflation, despite improving data. This follows the Governing Council’s significant decision in December to extend its asset purchase programme beyond March 2017 until the end of the year, at a reduced rate of €60bn per month in the extended period (from €80bn).
We currently have a range of diversified positions in Europe but the overall theme is primarily one of short duration. Within the eurozone, we are positioned for a steeper German Bund curve and are short or underweight French government bonds versus Bunds. In contrast, we are neutral in peripheral European sovereign bonds apart from an allocation to Italian inflation linked bonds.
Elsewhere in continental Europe, we are short Swedish, Polish, Czech and Hungarian rates. We are also long the Swedish krona on valuations and our view that the Riksbank may pare back its loose monetary policy stance. The central bank extended its QE programme in December, at a slower pace, but there was some disagreement between board members on the effectiveness and necessity for further asset purchases. We also have a favourable view of the Russian ruble.
Interestingly, in the corporate bond market there has been a relatively heavy supply of new issuance by both European and US issuers. However, European non-financial corporate issuers have placed more than expected in USD-denominated rather than EUR debt and most new deals in euros have been pricing with minimal new issue premium, leading to relatively lacklustre performance. As a result, we have been highly selective in our participation. Fortunately, animal spirits are alive and well in the European corporate sector and, as such, a number of interesting opportunities related to M&A financing are expected in the coming months.
In Asia, we believe that dispersion in monetary policy stances is creating some compelling opportunities. We are positioned for a steeper JGB yield curve in the long-end and favour Indian and Korean bonds.
Meanwhile, in Latin America, we retain our long positions in Brazil and Argentina. Last week the Brazilian central bank cut rates by another 0.75%, taking the Selic rate down to 13%.