Market insight

Our Market View 

This page outlines the expected scenario for the international financial markets, developed by Eurizon Capital SGR.
The information is updated on a monthly basis.

Eurozone still under observation



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Our Market View

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Scenario

  • US economic data indicate that economic growth is reaccelerating, after having slowed in the central months of 2010. Business confidence is rising back, in both the manufacturing and non-manufacturing sectors. However, job creation remains rather modest (December data were disappointing).

  • The euro area economies are still proving surprisingly resilient, although growth rates are slowing compared to the first half of 2010. Confidence indices were back on the rise in December, with Germany leading the way (the IFO index on business confidence in Germany hit a new historical high in December). However, the fiscal austerity measures approved by euro area governments will probably translate into weaker data in the months ahead.

  • Signals of a reacceleration of growth in the Emerging Economies were confirmed, in particular in China and India. In these regions, the strength of the economic growth is fuelling inflation, and prompting a tightening of monetary policy conditions (in the past few months, the central banks of China and India have resumed hiking rates).

  • The Fed is proceeding with its quantitative easing programme, as established at the FOMC meeting of 3 November. By the end of June the Fed plans to purchase USD 600bn in government bonds, in addition to the purchases already scheduled (for a total of 800/900 billion dollars). The aim is to support the economy and to aid the return of inflation to levels compatible with the Fed’s mandate. Renewed tensions over the bonds issued by peripheral euro area countries have prompted the ECB to confirm the extraordinary liquidity measures put in place. At the Governing Council meeting of 2 December, the ECB announced that it will confirm its 1-week, 1-month, and 3-month refinancing operations, with full allotment. Furthermore, the ECB is still purchasing government bonds issued by peripherals, with the aim of easing tensions on the markets.

Market Highlights

  • Short-term rates will stay low for many months to come, and therefore return on liquidity will remain very modest.

  • The short-term yields of government bonds issued by core countries (USA and Germany) are still on historically low levels, as they are pricing in markedly negative macro scenarios. The debt crisis affecting peripheral euro area countries remains the main theme on the financial markets, as well as the main source of risk. Among euro area peripherals, we still award a preference to Italian government bonds, which offer an appealing risk-return profile thanks to relatively more solid public finances, combined with virtuous private finance (high average wealth among households and low indebtedness). On the other hand, our view on the bonds issued by the other peripherals remains cautious.

  • Investment Grade bond spreads narrowed to levels the market seems to consider no longer compressible, and therefore unable to absorb the rise in core government bond yields-to-maturity. There seems to be further margin for a tightening of High Yield bond spreads, as the recovery of the cycle should keep the default rate low. Positive view on Emerging Economy bonds, especially with a view to taking advantage of the appreciation potential of emerging currencies against the euro.

  • Improving macro data, appealing valuations, and accommodative central bank policies (led by the Fed) are all supportive factors for the stock markets. The main element of risk is represented by tensions over the debt crisis in the euro area. However, unlike the situation on occasion of the Greek crisis in May, the markets are showing no particular perception of a contagion risk that may spread to the global stock markets. The ECB’s continued support of peripheral country government bonds was crucial in this sense.

  • Neutral view on the EUR/USD exchange rate, still guided by mixed fundamentals: the Fed’s ultra-expansive policy stance is negative for the dollar, while the euro is vulnerable to fears over the sustainability of peripheral euro area country debt.
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The information contained herein is updated on a monthly basis.
The opinions, forecasts or estimates contained in this section are given as at the date of publication and there is no guarantee that results or any other future event shall be consistent with the opinions, forecasts or estimates contained herein.
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