Q2: It’s all relative, says BlackRock

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By BlackRock’s Chief Investment Strategists, Ewen Cameron Watt and Stephen Cohen

Central bank easing

Central bank divergence remains a core theme in our outlook for the rest of this year. However, in Q1 it was the central banks that eased that dominated headlines. Alongside the European Central Bank’s (ECB) quantitative easing (QE) programme, over 20 central banks, including in emerging markets (EM), have eased policy so far this year – many through surprise rate cuts.

Why the rush? For some, it’s the global disinflationary environment, aggravated by the fall in oil prices. For other economies, it’s the strengthening effect large central bank (read: Bank of Japan, ECB) easing measures have on their domestic currencies, making their exports less competitive.

Central bank intervention has driven a ‘pull-to-zero’ in government bond yields, especially in Europe, where more than half of outstanding core government bonds are yielding below zero. The search for yield and income remains as big a challenge as ever.

Resurgence of Europe

While the US remains the driver of global growth, year-to-date the positive surprise has come from Europe. European economic data has beaten low expectations, helped by the weakening euro. In contrast, the US, outside of the labour market, has seen its economic momentum slow sharply from last year.

Signs of a European recovery have helped allay fears of global deflation – a fear exacerbated in 2014 by the oil price crash. The oil price drop itself has triggered a much-needed ‘wealth transfer’ from oil-producing countries to consumers, benefiting global economies such as the eurozone and parts of EM in Asia.

So where does this leave divergence? Expectations for those central banks most likely to raise rates, the Bank of England (BoE) and Federal Reserve (Fed), have been gradually pushed back. However, we believe 2015 is still set to be the year the US raises interest rates away from zero. Despite the slowdown in US economic momentum, we think a rapidly improving labour market will lead the Fed to raise interest rates, most likely now in September.


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