3 Things the European Investment Grade Fixed Income Team Talked About Last Week

Architect Looking out of WindowCentral Bankers Start Talking Again: 

Whilst August is traditionally a quiet month in markets with many participants on vacation, central bankers have been quite active in trying to guide markets to their way of thinking. In the U.S., San Francisco Federal Reserve President John Williams started his August 15th Economic Letter by stating that “the time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural rate of interest”. That’s central banker code for saying “governments need to do more on the fiscal side and we need a new way to think about monetary policy”. Shortly afterwards the minutes of the July U.S. Fed meeting were published, showing a divided committee. Some members thought that the economy was sufficiently strong to weather a rate increase, others felt that they would prefer to wait for inflation to move higher before moving. Across in Europe, the minutes of the ECB’s July meeting showed that the fall-out from the Brexit vote in the UK “has thus far been less marked than many had anticipated”. Once again, the ECB noted that they stood ready to take whatever actions were necessary to reach their 2% inflation target, but repeated their mantra that Eurozone governments needed to help as well, preferably by enacting structural reforms. In the UK, speculation is mounting that the new Prime Minister Teresa May could announce a fiscal stimulus package that, along with the Bank of England’s (BoE) recent monetary stimulus measures, might help the UK economy weather the fall-out from the Brexit vote. Finally, in Japan, Prime Minister Shinzo Abe launched a new 4.6trn Japanese Yen (U.S. $45bn) stimulus package to boost a struggling Japanese economy. All this suggests that global governments are moving closer to acknowledging that central banks and Quantitative Easing (QE) programmes alone cannot solve the world’s problems. With long-term interest rates at historically low levels, it makes sense, in our opinion, to loosen the purse strings and boost fiscal spending, financed by issuing long-dated bonds (as Japan is considering doing). In the medium-term, this could lead to higher bond yields and steeper yield curves.

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China: How Serious is the Debt Issue?

chinaEmerging Markets (EMs) continue to drive global growth, with China still accounting for the lion’s share. However, China’s increasing debt remains a significant concern for global investors. Here, our featured contributor, Pioneer Investments’ Economist Qinwei Wang, takes a closer look at China’s debt situation.

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European Equities: Life After Brexit

520038463One month on and European Equity investors could be forgiven for thinking the UK Referendum never happened; the market has displayed an impressive amount of equanimity regaining nearly all lost performance. Looking forward, should investors expect ongoing market composure or is a period of consolidation due?

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EMs: Are Emerging Markets Becoming Safer than Developed Markets?

ThinkstockPhotos-176581146When looking at global growth expectations for the near future, we continue to see a confirmation of the increasing weight of emerging markets (EMs) in the global economy and further divergences in the growth path between them and developed markets (DMs) (see chart below).

All in all, EMs appear to be in a more resilient position, but they are still exposed to major risks, with a slowdown in China being the most significant. While China continues to play the most relevant role in the emerging space, other countries, such as India, continue to increase their relevance.

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Japan: A New Wave of Policy Intervention?

WFL_094Since the beginning of the year, macro conditions in Japan have remained quite weak. We expect that Japanese GDP will grow by 0.6% YoY in the current year 2016, and around 0.5% YoY in 2017, under a Low Low Trap scenario. Our scenario has been adjusted downward for a stronger yen than previously expected. The trigger for a stronger yen has been the “new” risk environment (global higher uncertainty) induced by the UK referendum.

A stronger yen is expected to hit economic performance in Japan mainly through Profits/Capex and Net Trade. Moreover, it’s going to add concern with respect to Corporate Profitability that appears to have already peaked, especially with external demand far from buoyant.

The inflation outlook has marginally deteriorated since the beginning of the year: although the path in H2 remains upward, we expect inflation around 0.5% YoY by the end of 2016 and marginally increasing in 2017. Inflation will remain far below the BoJ target until the next planned Consumption Tax hike in 2019.

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