Eurozone: ECB’s QE offset by economic improvements and Greece’s collapse?


Fund Commentary
26 May 2015


In April, European economies continued to show signs of improvement whilst US economic statistics were mixed and therefore rather disappointing, including poor unemployment figures. In Europe, the recovery seems to be on track, leading France and Germany to raise their projections for GDP growth.

The European Commission increased its growth forecast as well, including Italy which was revised from 1.2% to 1.4%. Despite this good news, unemployment remained very high: increasing in France (with total jobseekers above 3.5 million), in Italy (12.7%) and in Spain (23.7%). The current mood of the market, coupled with a substantial improvement in the economy, a rally in equity markets and higher inflation projections, has prompted many investors and analysts to bet that the European Central bank (ECB) will cut back its bond purchases before the end of the year. Mr Draghi did not comment but noted that this purchasing programme only started in March. Furthermore, negotiations between Greece and its partners did not progress and could in the coming weeks lead to a widening of peripheral spreads despite the ECB’s QE. In the US, unemployment figures were far below forecasts, adding only 126’000 jobs instead of 245’000 as projected, whilst the figure for the previous month was revised from 295’000 to 266’000. More importantly, wage growth, which should be the catalyst for higher inflation in the coming months, remained sluggish. The Federal Reserve (Fed) opened the door to a first rate increase in June but some FOMC members comments show that US policy makers are still divided over whether they would raise interest rates. The Fed’s Mr Williams said “at any time from now” and fellow committee member Mr Evans would be in favour of a raise in early 2016. In Asia, the Bank of Japan (BoJ) stayed dovish and the People’s Bank of China (PBoC, the Chinese Central Bank) prepared the markets for another wave of easing due to lower than expected growth in China.

The German government yield curve saw a bearish steepening this month, the 2y yield decreased from -0.25% to -0.22% (+3 bps), the 5y from -0.10% to 0.01% (+11 bps) and the 10y from 0.18% to 0.37% (+19 bps) with a low on 20th Apri at 0.07%. On the credit side, the US corporate CDX index remained static at 64 bps while the European iTraxx Main widened slightly from 56 to 61Assets did not change significantly during the month (from EUR 120.4 to 119.6 million). The Fund participated in two new issues: Anheuser Busch InBev 2023 and Bristol Myers Squibb 2025. The decrease in weighting of Chinese Oil & Gas companies, which started in March, led to the sale of the remaining positions in Cnooc and Sinopec. Consequently, exposure to China was reduced to 0% and the weight of Oil & Gas from 6.8% to 5.8%. At month end, the Fund held 51 issues and 50 issuers. 

The duration overlay policy was stable in April. The portfolio’s modified duration stayed at 6.0 and the modified duration of the Fund slightly increased from 2.66 to 2.72.

The Investment Adviser believes that the ECB, which started its own QE in March, will continue to be active in the global currency and yield war. This first ECB QE is already supporting European economies but not enough to consider a cutback of Mr Draghi’s bazooka. Depending on market reactions, the Investment Adviser may maintain the duration risk of the Fund above 2.5 and below a maximum of 3. Peripheral spreads will not be considered as a buying opportunity as long as the Investment Adviser is worried about Greece. On the credit side, the European QE will underpin high grade corporate bonds. The bond selection will be driven by opportunities in both primary and secondary markets. As a consequence, positive returns will still be achievable as a result of the carry of corporates, their spread tightening potential, credit selection and active management of duration and yield curve.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Adviser to the Fund as of 13/05/15.