Further round of QE highly likely

Kevin Lilley, portfolio manager of the Old Mutual European and European (ex-UK) Equity Funds comments on Mario Draghi possibly implementing further round of QE.

Given the prevailing weakness in the euro/dollar exchange rate it is highly likely that a further round of quantitative easing is on the cards when the governing council of the European Central Bank meets on 03 December.

No one would question President Mario Draghi’s motive of continuing to broaden and strengthen the eurozone economy, whereby growth, while sustainable, still remains fragile.

Nevertheless, while investors scrutinise the currency markets, I believe, the key indicator to watch is the spread between European and US bond yields.

An inevitable rise in US interest rates may go some way towards correcting the huge disparity that exists between US Treasuries and German Bunds by lifting European bond yields higher.

This would come about on account of US interest rates being perceived as the key risk free rate and the one off which all other developed market bonds are priced.

From a portfolio perspective, a rising bond yield environment has historically been best for cyclical stocks. Banks typically benefit from the widened spread between borrowing and saving rates, while automotive and industrial companies gain from a perceived strengthening economy.

 

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