- ECB: dovish tone and calm markets - but flexibility needed with volatility ahead
ECB: dovish tone and calm markets - but flexibility needed with volatility ahead
Monday 30 April 2018
Research / Market
- ECB tone: The overall stance is still broadly accommodative and aims to confirm the consensus view. It is reasonable to expect a gradual tapering of the Asset Purchase Programme (APP) in Q4 and the first rate hike in mid-2019. However, the ECB still questions the reading of the recent deterioration seen in the surveys: it seems likely that it could wait until July to clarify its monetary strategy.
- Economy and risks: As expected, President Draghi did not talk-down the economy but, instead, took the opportunity to stress that real GDP growth outlook, despite signs of moderation in Q1, is still solid and broader based in terms of engines of growth. While the risks to growth are still considered balanced, the "global risks" - in particular the rise in protectionist tensions - have become prominent.
- Investment strategy: Carry is still the ‘name of the game’ to generate value in Euro fixed income (as the recent slowdown in growth does not call for a faster change in current monetary policy) at least until the next meeting. High flexibility applied to portfolio management is a must, in our view, to benefit from the expected volatility that will arise when ECB delivers a clearer message on what will come next. On global credit, different phases in the cycle call for actively playing sector divergences in Europe and the US. In Europe, we are cautious on industrials and prefer financials, while in the US is the opposite: we prefer industrials, energy and TMT, but we are less keen on financials.
Bavarian elections: Eropean political landscape continues to evolve
"The poor performances from the traditional parties in the Bavarian elections represent early signs of a political reshuffle at the federal level."
Late cycle features at play: more pain, but not the end of the game
"We expect further volatility and possible additional down moves led by the growth part of the market and possible pressure on the high yield side as well. But it is not going to be a market capitulation."
Italian budget proposal under scrutiny
"The key points of the budget law. The Italian Government negatively surprised the markets by announcing a substantially increased budget deficit target for 2019-2021 to 2.4% in a move that could undermine the potential to reduce the Italian debt burden (130% of GDP) in the coming years"