The European Central Bank’s (ECB) Governing Council met today, marking the first of a series of high profile meetings scheduled over the next few days (the Federal Open Market Committee (FOMC) meeting on July 27th, the Bank of Japan (BoJ) meeting on July 29th, Bank of England (BoE) on August 4th), which have become a strong focus for investors globally.
1. ECB Minutes – “Never Mind the Quality, Feel the Width”
A UK sitcom aired in the late 1960’s, featuring two tailors, with the above title. The reference was to one tailor’s assertion that quantity was more important than quality. There was an air of this phrase about the minutes of the ECB’s meeting on June 2nd, released last week. As expected, the minutes contained no major surprises. But closer inspection revealed an interesting snippet on one of the market’s hot topics – the “capital key” component of the ECB’s bond-buying programme. You may remember in last week’s blog we noted the speculation that the ECB might switch their bond buying from being based on countries’ capital keys to a ratio based on market-capitalisation. This would be a big advantage to Italy, who have the highest weighting in Euro sovereign bond indices as a result of the large amount of Italian sovereign debt outstanding. Those rumours were quickly dispelled by EU and ECB sources early last week, but the ECB minutes showed that the topic has been discussed at general council level. The key paragraph was as follows : “…as regards the asset purchase programme, a continued smooth implementation could be observed overall, although a remark was made that markets appeared to foresee future challenges in sourcing sufficient volumes of public bonds for some jurisdictions under the present limits, which could contribute to increased price volatility…it was pointed out that, if assets were indeed close substitutes, it should not matter much which precise assets were being purchased under the asset purchase programme, but rather the overall purchase volume and associated money creation”. So that is the ECB telling us that they are not so worried about the exact composition of the bond buying, but rather the overall bigger picture. If that means the capital key rules have to bend a bit, so be it. We continue to believe that some formal change to bond-buying programme rules will be made at coming meetings that will address the current concerns about country limits.
Paresh Upadhyaya is Director of Currency Strategy, U.S. at Pioneer Investments.
The UK’s vote to leave the EU will have global economic and financial consequences. During the initial days of uncertainty, global financial markets sold off sharply as markets were determining whether Brexit was a regional or global shock to the world economy. The indications so far are that this should be a regional shock contained within the UK/Europe area and, as a result, global financial markets are so far successfully riding out temporary volatility. Continue reading
While it has only been a week since the U.K. referendum vote, our featured contributor Gabriel Altbach, Pioneer’s Head of Global Strategy and Marketing, took a look at the preliminary fund flow data to see how investors and advisors were reacting.
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Tagged brexit, currencies, ECB, Economy, Economy update, European markets, Eurozone, Global, market volatility, markets, monetary policy, redemptions, volatility
1. BREXIT – One week on
10 days after the BREXIT vote, and markets appear to have taken the result in their stride. Sterling has stabilised around the 1.33 level against the U.S. Dollar and 83.5c against the Euro. The FTSE100 has recovered all of its losses suffered in the immediate aftermath of the result, and is now higher than the day before the vote. But looks can be deceiving and we certainly do not think the UK or financial markets are out of the woods yet. Our view is that Sterling’s rally this week is a temporary phenomenon, most likely caused by the closing of hedges and short positions built up in advance of the vote. With tremendous political uncertainty in the UK, and the prospect of a mild recession (see more below), we expect further weakening of GBP against U.S. Dollar and Euro. UK gilts are expected to keep pace with other international bond markets and will be supported by accommodative monetary policy and “safe-haven” flows from other UK assets. By now, the consensus appears to be that the effect of BREXIT will reduce UK economic activity by about 1.5%-2% per annum over the next 12 months, thus pushing the UK into a technical recession in early 2017. Certainly, Standard & Poors were sufficiently concerned about the outlook to reduce the UK’s sovereign rating by two notches last week, from “AAA” to “AA”, and left the outlook on Negative watch. Some investors have pointed to the FTSE100’s performance as indicating that equity investors are taking a different view. We will leave that point to our equity colleagues to debate, but will point out that 75% of the FTSE100’s earnings come from outside the UK, and are now more valuable due to the fall in Sterling. The FTSE250 and FTSE350, which are more domestically focussed, are still lower than where they were pre-the referendum.