New year jitters for bond markets as ECB cuts back stimulus

There were New Year jitters for the bond markets as the ECB cut back on stimulus. (AFP)
Updated 02 January 2018
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New year jitters for bond markets as ECB cuts back stimulus

LONDON: Borrowing costs across the euro area shot higher on Tuesday as a cut in monthly ECB asset purchases became a reality, with hawkish comments from a top official and strong data hurting sentiment toward bonds on the first trading day of the year.
Bonds from the bloc’s periphery, the biggest beneficiaries of European Central Bank stimulus, bore the brunt of the selling. Yields in Italy, Spain and Portugal rose 6-10 basis points each, widening the gap over German peers.
But even “core” or top-rated bond markets were left unscathed from the selling pressure, with Germany’s 10-year bond yield hitting two-month highs.
Benoit Coeure, the Frenchman in charge of carrying out the ECB’s bond purchases, sees “a reasonable chance” the 2.55 trillion euro stimulus program will not be extended again when it expires in September, he told a Chinese financial magazine at the weekend.
The comments highlight that the days of extraordinary monetary stimulus are nearing an end given stronger economic conditions and signs of a pick-up in inflation.
Data on Friday showed inflation in Germany, Europe’s biggest economy, hit its highest level in five years in 2017. A survey on Tuesday showed euro zone manufacturers ended 2017 by ramping up activity at the fastest pace in more than two decades.
ECB monthly bond purchases, which have long underpinned bond yields, have fallen to 30 billion euros from 60 billion euros.
That cut in purchases from the start of January, unveiled in October, comes just as investors brace for a hefty month of supply — a potentially powerful headwind for bond markets.
Spain said on Tuesday it will issue bonds worth between 3.5 billion euros and 5 billion euros at a scheduled auction on Thursday.
“While the cut in ECB asset purchases is not a surprise, there is some uncertainty as to how the markets will adjust to this in an unusually heavy month for supply,” said Rainer Guntermann, a rates strategist at Commerzbank in Frankfurt.
“The more hawkish commentary from the ECB is also weighing on markets.”
Germany’s 10-year bond yields rose 2.5 basis points to 0.46 percent, the highest since late October. German 30-year bond yields jumped almost 5 bps to 1.31 percent , their highest since mid-November, before dropping to 1.24 percent by late trading.
In Italy, where borrowing costs rose last week after the president called a general election for March 4, 10-year bond yields extended their rise to a two-month high above 2 percent, going up nearly 10 bps by the afternoon.
That pushed that gap over German equivalents to around 165 bps, its widest since Oct. 19. Spanish and Portuguese bond spreads also widened against Germany in a sign that investors were reducing their exposure to southern European bond markets.
“The widening in peripheral spreads shows that the market is concluding that the recent spread tightening is inconsistent with a more hawkish ECB,” said Peter Chatwell, head of rates strategy at Mizuho.
Analysts said Portuguese five-year bonds were also coming under pressure from expectations of a syndicated bond deal of this maturity next week.
Most other euro zone bond yields were up 2-4 basis points, with trade subdued after Monday’s New Year’s holiday. There was also some caution ahead of the implementation on Jan. 3 of the wide-ranging EU financial markets directive known as MiFID II.


IMF warns of rising risks to global growth amid trade tensions

Updated 16 July 2018
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IMF warns of rising risks to global growth amid trade tensions

  • Worsening trade confrontations pose serious risks to the outlook, the IMF said
  • The fund warns growth could be cut by a half point by 2020 if tariff threats are carried out

WASHINGTON: The global economy is still expected to grow at a solid pace this year, but worsening trade confrontations pose serious risks to the outlook, the International Monetary Fund said Monday.
The IMF’s updated World Economic Outlook (WEO) forecast global growth of 3.9 percent this year and next, despite sharp downgrades to estimates for Germany, France and Japan.
The US economy is still seen growing by 2.9 percent this year, and the estimate for China remains 6.6 percent, with little impact expected near term from the tariffs on tens of billions of dollars in exports the countries have imposed on each other so far.
“But the risk that current trade tensions escalate further — with adverse effects on confidence, asset prices, and investment — is the greatest near-term threat to global growth,” IMF Chief Economist Maurice Obstfeld said.
The fund warns growth could be cut by a half point by 2020 if tariff threats are carried out.
Although the global recovery is in its second year, growth has “plateaued” and become less balanced, and “the risk of worse outcomes has increased,” Obstfeld said in a statement.
The report comes as US President Donald Trump has imposed steep tariffs duties on $34 billion in imports from China, with another $200 billion coming as soon as September, on top of duties on steel and aluminum from around the world including key allies.
China has matched US tariffs dollar for dollar and threatened to take other steps to retaliate, while US exports face retaliatory taxes from Canada, Mexico and the European Union.
“An escalation of trade tensions could undermine business and financial market sentiment, denting investment and trade,” the IMF report said.
In addition, “higher trade barriers would make tradable goods less affordable, disrupt global supply chains, and slow the spread of new technologies, thus lowering productivity.”
The IMF said growth prospects are below average in many countries and urged governments to take steps to ensure economic growth will continue.
The fund said global cooperation and a “rule-based trade system has a vital role to play in preserving the global expansion.”
However, without steps to “ensure the benefits are shared by all, disenchantment with existing economic arrangements could well fuel further support for growth-detracting inward-looking policies.”
The sweeping US tax cuts approved in December will help the economy “strengthen temporarily,” but growth is expected to moderate to 2.7 percent for 2019.
And while the fiscal stimulus will boost US demand, is also will increase inflationary pressures, the WEO warned.
China’s growth also is seen slowing in 2019 to 6.4 percent.
After upgrading growth projections for the euro area in the April WEO, the IMF revised them down by two-tenths in 2018 to 2.2 percent, due to “negative surprises to activity in early 2018,” and another tenth in 2019 to 1.9 percent.
The estimates for Germany, France and Italy were cut by 0.3 points each, with Germany seen expanding by 2.2 percent this year and 2.1 percent in 2019. France’s GDP is expected to grow 1.8 percent and 1.7 percent.
Meanwhile, Britain is now forecast to grow 1.4 percent this year, 0.2 points less than the April estimate, and 1.5 percent in 2019.
Japan’s GDP is seen slowing to 1.0 percent this year, two-tenths less than previously forecast, “following a contraction in the first quarter, owing to weak private consumption and investment.” It should grow 0.9 percent the following year.
India remains a key drivers of global growth, but the GDP outlook was cut one-tenth for this year and three-tenths for next year to 7.3 percent and 7.5 percent, respectively.
Brazil saw an even sharper 0.5-point downward revisions from the April forecast, to 1.8 percent this year.