Markets may misjudge risk of Greek exit from euro-area

2015 ◽  
Keyword(s):  
Euro Area ◽  
Ownership Structure ◽  
Public Debt ◽  
Focal Point ◽  
Quantitative Easing ◽  
Southern Europe ◽  
Bond Yields ◽  
German Government ◽  
Content Type ◽  
Private Investors

Significance While the scope for widespread contagion across Southern Europe is much more limited this time around because of the new ownership structure of Greece's public debt -- more than 80% of the stock is held by the official sector, in stark contrast to end-2011 when private investors held the bulk of Greek bonds -- a loss of confidence in the ECB's ability to implement a credible and effective programme of quantitative easing (QE) could increase investors' sensitivity to Greece's political woes. Impacts Despite Greece's re-emergence as a focal point for market anxiety, the bond yields of Portugal, Spain and Italy remain at near-record lows. This is partly due to market expectations of full-blown QE by the ECB. Yet Draghi must come up with a QE programme that is both credible and has the backing of a German government wary of further credit risk.

SNB move will accentuate bond-equity divergence

2015 ◽  
Keyword(s):  
Euro Area ◽  
Yield Curve ◽  
Equity Markets ◽  
Bond Markets ◽  
Quantitative Easing ◽  
Bond Yields ◽  
Content Type ◽  
Sovereign Bond ◽  
Advanced Economies ◽  
The Us

Significance The move mainly aims to pre-empt the widely anticipated launch of a sovereign quantitative easing (QE) programme by the ECB on January 22. However, it will accentuate divergences between bond and equity markets. Sovereign bond yields for most advanced economies are falling to new lows and are increasingly negative at the shorter end of the yield curve, because of deflation fears and lacklustre growth outlooks. Yet equity markets are hovering near record highs, buoyed by the US recovery and expectations of further monetary stimulus in the euro-area. Impacts Bond markets will be driven by deflation fears, while equity markets, especially US stocks, will be buoyed by Goldilocks-type conditions. Market expectations that the ECB will launch a sovereign QE programme will make bond yields fall further. Bond yields will be suppressed by investor scepticism about the ECB's ability to reflate the euro-area economy.

German shift on austerity would risk 'wrong' lessons

2015 ◽  
Keyword(s):  
Euro Area ◽  
Credit Rating ◽  
Bond Yields ◽  
Trade Surplus ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Black Spots ◽  
Angela Merkel ◽  
Deficit Financing ◽  
The Government

Significance Chancellor Angela Merkel faces a rising tide of euro-area members in favour of a policy shift away from austerity and possibly towards more favourable debt deals for euro-area black spots. Adding to the pressure for change, her own voters may prefer a slower pace of debt reduction: German government debt has already been falling as a percentage of GDP -- from over 80% in 2010 to under 77% at the end of 2014 -- and debt is starting to fall in absolute terms as well. The government has delivered enough stabilisation (ie, austerity) and growth to tame the 2009-10 debt surge and maintain its AAA credit rating, but is now over-achieving in terms of its own tough targets because the greater-than-expected fall in debt interest costs is pushing the budget into surplus. Some modest spending adjustments look likely to curb this windfall surplus, yet many will argue that more could be done to re-energise the sluggish economy -- and boost the euro-area. Impacts The plummeting euro will provoke another rise in German exports (already near 50% of GDP) and tensions over Germany's bulging trade surplus. While a fiscal stimulus and/or higher wage payments could address these tensions and raise imports, there is no sign of such action. Germany's critics are gathering support to end austerity, to the point of ignoring the risks of deficit financing and reneging on debts. Ultra-low German bond yields, encouraged by the prospective supply fall, are dragging down euro-area yields, delivering wider benefits.

Weaker euro-area may affect Emerging Europe

2016 ◽  
Keyword(s):  
Euro Area ◽  
Credit Rating ◽  
Emerging Market ◽  
Corporate Bond ◽  
Bond Yields ◽  
Content Type ◽  
Central Eastern Europe ◽  
Political Risks ◽  
Government Bond Markets ◽  
The Uk

Subject The fallout in Central-eastern Europe (CEE) from Brexit. Significance While CEE government bond markets are being supported by investor expectations of further monetary stimulus in response to the uncertainty stemming from the UK decision to leave the EU ('Brexit'), the zloty is suffering from both its status as one of the most actively traded emerging market (EM) currencies and concerns about the policies of Poland's new nationalist government. A sharp Brexit-induced slowdown in the euro-area economy would put other CEE currencies and equity markets under strain. Impacts The ECB's full-blown QE is helping keep government and corporate bond yields in vulnerable southern European economies historically low. Uncertainty generated by Brexit reduces the scope for further US interest rate hikes later this year, lifting sentiment towards EM assets. The Brexit vote will increase investors' sensitivity to political risks, auguring badly for Poland. Poland has already suffered a downgrade to its credit rating mainly as a result of the interventionist policies of the PiS government.

Even gradual quantitative tightening raises GDP risks

2019 ◽  
Keyword(s):  
Euro Area ◽  
Commercial Banks ◽  
Large Scale ◽  
Sales Tax ◽  
Quantitative Easing ◽  
Content Type ◽  
Balance Sheets ◽  
Liquidity Provision ◽  
The Us ◽  
Repurchase Agreements

Subject Quantitative easing and GDP. Significance The US Federal Reserve (Fed), Bank of Japan (BoJ) and ECB have all conducted quantitative easing (QE) programmes since 2008, purchasing assets from commercial banks on a large scale and without predefined repurchase agreements. These purchases have swollen the balance sheets of the three largest central banks and provided commercial banks with large liquidity buffers. Impacts The pace of the Fed withdrawing liquidity may slow; if US-China conflict worsens or another shock occurs, the Fed may consider reversing. In the euro-area, there are no new liquidity provisions, at a time when German GDP is weakening and Brexit threatens EU growth. New liquidity-provision plans may be hard for the euro-area to agree; if this is off the table, so are liquidity-withdrawing measures. The BoJ may stop scaling back its bond and ETF holdings if markets suffer; the upcoming sales tax rise will also hit spending.

Slovakia will not change export-led model overnight

2015 ◽  
Keyword(s):  
Public Debt ◽  
Purchasing Power ◽  
External Financing ◽  
Bond Yields ◽  
Content Type ◽  
Breathing Space ◽  
Debt Levels

Significance Impacts The IPO should help cut public debt levels and will create fiscal breathing-space for more spending ahead of the 2016 elections. Falling bond yields will ease debt servicing; Slovakia will comfortably meet its external financing requirement. The deflationary trend will peter out later in 2015 but persistently low inflation will help boost household purchasing power.

Strong data increase pressure on ECB to wind down QE

2017 ◽  
Keyword(s):  
Euro Area ◽  
European Central Bank ◽  
Oil Price ◽  
Consumer Confidence ◽  
Quantitative Easing ◽  
Content Type ◽  
Core Inflation ◽  
European Central ◽  
Asset Purchases ◽  
Japanese Yen

Subject Outlook for euro-area uantitative easing. Significance Data released today by the European Commission showed business and consumer confidence rose to the highest in almost six years in February, further fuelling the debate over how quickly the European Central Bank (ECB) should wind down its two-year-old quantitative easing (QE) programme. Headline inflation rose to 1.8% year-on-year in January, the fastest in four years and just below the ECB’s 2.0% target. However, core inflation remains below 1.0%, justifying the continuation of the central bank’s asset purchases despite fierce resistance from Germany. Impacts The euro has fallen against the Japanese yen and the dollar this month because of rising concern about euro-area political risk. Fears of a sudden end to the 30-year bull market in bonds have eased; ten-year US yields are down over 20 basis points since mid-December. Further upside potential for the oil price is likely to be limited due to US shale and countries exempt from the OPEC cuts raising output. In this era of unconventional policy, the ECB could maintain QE to stabilise weaker members but raise rates to satisfy stronger ones.

US-induced volatility clouds the 2019 markets outlook

2018 ◽  
Keyword(s):  
Financial Markets ◽  
Focal Point ◽  
Emerging Market ◽  
Bond Yields ◽  
Content Type ◽  
The Us ◽  
Treasury Bond ◽  
Asset Class ◽  
Main Support ◽  
Global Growth

Significance The idiosyncratic vulnerabilities that built up in financial markets in 2018 are morphing into a more pronounced global growth scare, exacerbated by concerns about the US Federal Reserve (Fed) being too hawkish. The combination of slower euro-area and Chinese growth and US monetary tightening is weighing on asset prices and increasing volatility after a year in which almost every major asset class suffered a loss. Monetary stimulus withdrawal is the focal point, as it has been the main support for markets since 2008. Impacts Ten-year US Treasury bond yields are down 50 basis points since April; global growth worries will make such ‘safe havens’ more attractive. Amid the worries, emerging market (EM) equities are up 1.5% from an October 29 low and may be more resilient than in previous downturns. The Brent crude oil price will be to the lower end of 50-80 dollars/barrel in 2019 amid growth and oversupply worries, reducing inflation.

Euro-area quantitative easing extension gets closer

2015 ◽  
Keyword(s):  
Euro Area ◽  
Quantitative Easing ◽  
Content Type

Headline EURO-AREA: Quantitative easing extension gets closer

EU recovery fund will be vital for fiscal reform

2021 ◽  
Keyword(s):  
Constitutional Court ◽  
Southern Europe ◽  
German Government ◽  
Fiscal Reform ◽  
Fiscal Stimulus ◽  
Content Type ◽  
Number Of Factors ◽  
Legal Challenges ◽  
Effective Use ◽  
The Impact

Significance Reform is needed if hard-hit, highly indebted countries are to pursue pro-growth policies over the coming years. The extent of reform will depend on a number of factors, especially the formation of the next German government and the impact of the Next Generation EU (NGEU) recovery fund. Impacts Without more ambitious fiscal stimulus, Europe’s recovery will lag behind other developed regions. Future efforts to enhance EU fiscal powers and integration would likely face legal challenges from Germany’s constitutional court. Effective use of the EU’s recovery fund may force Eurosceptic parties in southern Europe to moderate their positions.

Negative euro-area bond yield universe will expand

2015 ◽  
Keyword(s):  
Euro Area ◽  
Sovereign Debt ◽  
Bond Yields ◽  
Government Bonds ◽  
Content Type ◽  
Bond Yield ◽  
The Us ◽  
Debt Issuance ◽  
Low Levels ◽  
Lift Off

Subject The euro-area government bonds outlook in the wake of the ECB's QE. Significance Strong demand among investors is pushing down yields on both government and corporate debt to unprecedentedly low levels, creating a rapidly expanding universe of negative bond yields. According to Royal Bank of Scotland (RBS), approximately one-third of euro-area government bonds now trade with a negative yield, including more than 50% of German, French, Dutch and Austrian public debt. Of the ECB's 60 billion euros (65 billion dollars) of monthly bond purchases, about 40 billion euros are estimated to involve government bonds, exceeding net government debt issuance across the euro-area. Therefore, yields are likely to fall further in the short term. Impacts Strong demand for 'safe haven' assets is compressing yields on government and corporate bonds, with negative rates on many securities. About one-third of euro-area sovereign debt is currently trading with a negative yield. The ECB's bond purchases and a relative scarcity in debt issuance will contribute to lower euro-area bond yields further. Persistent fears about growth and inflation will also contribute to lower yields. Negative yields will exacerbate the mispricing of risk, as investors bring forward their expectations regarding the US rates lift-off.

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