(Part one of two) Investors are increasingly of a view that the future will be tough and they will face a long period of unprecedented challenges. This evolving environment will likely have profound consequences not only for how investors make investment decisions, but also for the future of the asset management industry. I believe this is the time to rethink our business as an asset manager and build new partnerships with clients.
From an investment point of view, we foresee long-term expected returns for all asset classes (on a 10-year horizon) continuing the downward trend that characterized the last decade.
1. ECB – No Taper Tantrum, Just a Taper Sulk
The headline was quite startling and caught the market unawares – “ECB said to near consensus on need to taper Quantitative Easing (QE) before it ends”. It came late last Tuesday afternoon, a day that had already seen Italy issue €5bn of 50-year debt, which is quite a sizeable chunk of duration to be absorbed by the market. So the market was already trading a bit heavy before it saw the ECB headlines. Whilst the immediate reaction was quite contained (a 5bps rise in 10-year yields), the trend continued over the course of the week, and 10-year German Bund yields finished the week in positive territory at 0.03%, up over 15bps from where they started the week. Market commentary immediately drew parallels with the infamous “taper tantrum” in the U.S. in mid-2013, when U.S. 10-year Treasury yields rose 140bps in the space of four months after U.S. Federal Reserve (Fed) Chairman Ben Bernanke hinted that the Fed might taper their QE programme. But we think such a reaction is unlikely for a number of reasons. Firstly, the ECB is nowhere near meeting its inflation target, nor is it likely, in our opinion, to come close to that target in the next 18 months. Secondly, there was nothing in the minutes of the ECB’s September meeting that indicated any discussion concerning tapering had occurred. Thirdly, the ECB minutes highlighted that current inflation forecasts are conditional on the current monetary policy stance and current market expectations about its future course. Fourthly, the comments were attributed to ECB officials rather than Governing Council members, and the comments were quickly refuted by both the ECB’s press officer and members of the Governing Council. It may be that the ECB were engaged in a “kite-flying” or “balloon-floating exercise”, which happens regularly in politics. Taking all the above into account, and the fact (as mentioned in this blog last week) that net government bond supply will be negative in Q4 2016 after taking into account ECB buying, we feel it is unlikely that the bond sell-off will go much further.
(Part two of two.) I recently discussed some thoughts on Fixed Income Opportunities ahead of next Central Banks’ meetings with my colleagues Mike Temple, Director of Credit Research, US and Mauro Ratto, Head of Emerging Markets. We think we are closer to a turning point for financial markets. Financial markets are questioning the ability of Central Banks (CBs) to boost output and inflation, while CBs have started to hint that they cannot deliver stimulus forever. Markets are wondering if the marginal benefits of current monetary policy stances truly surpass the marginal costs – as CBs continue to assert. The weakening of investors’ trust may be powerful enough to open the door to noisy volatility.
We may see more frequent episodes of market turmoil. Even if these do not reach extreme levels, we may see spikes in volatility and increases in positive correlation between bonds and equities as markets perceive some discomfort by CBs with the current policies stances. Continue reading
(Part one of two.) The spike in volatility seen during a busy September, with meetings of the major Central Banks (CBs) taking place, reveals unsettling dynamics that could potentially break the long period of complacency that has characterized markets in recent times. In the past nine months, almost all asset classes have delivered positive returns. The slow, but steady reflation of risk assets and the slow, but steady decline in yield curves across the globe have been the result of the ongoing financial repression, which the expansionary monetary programs of Central Banks continue to nourish.
Pioneer Senior Economist, Andrea Brasili and Head of European Government Bonds, Cosimo Marasciulo contributed to this content. Click here to download a PDF.
On Sunday, December 4, Italian voters will be asked to confirm, or not, a set of reforms that will significantly change the Italian institutional framework. A summary of the proposed reforms and their potential impact follows.