“Historical decoupling” of US and European bond markets to happen, DNCA foresees

DNCA’s manager and management spokesperson Igor de Maack has highlighted disappointing Q3 company earnings as a reflection of the deceleration in the global economy in his last market comment.

If De Maack put some sectors apart like telecoms, he explained upward earnings revision should no longer be expected for 2015 or 2016. In his view, sectors such as commodities will suffer more next year than 2015.

DNCA’s manager assessed the junction has now been made between macroeconomy and microeconomy.

“The question for investors is now whether the pace of the slowdown will gather speed or not. It is possible that the trough of Chinese GDP was reached during the third quarter. The question of the Chinese slowdown and the vigour of the US economy is crucial as the euro zone is not immune against external shocks.

“Many investors have doubts about the solidity and the sustainability of the European recovery, especially because industrial investment figures are still poor. Even so, European companies – and particularly those in southern Europe (including France) – still expect double-digit earnings growth for 2015 and 2016. This is not abnormal since it is these countries (France, Italy, Spain) that show the best momentum in in terms of economic velocity – even though growth remains weaker than in a typical recovery,” De Maack stressed.

De Maack also reported that the European economy’s growth rate (+1.5% in 2015) is “not sufficient to completely reassure the financial community.” According to him, ECB’s quantitative easing shall be extended, that would make it possible to absorb a monetary policy tightening decision in the United States.

“Investors must now base their reasoning on a less favourable macro- and microeconomic phase and an increasingly obvious monetary divergence: they must first psychologically accept the US monetary normalisation which seems inevitable and sound, given the US economy’s performance (e.g. the latest unemployment figures).

“Furthermore in Europe, they now know that they have the ECB’s umbrella. The central bank is clearly determined to revitalise the European economic cycle, which is weaker than the US cycle. It is not surprising that monetary policies diverge when the two economies are at such different stages of the cycle. This is not a total desynchronisation, but a cyclical divergence.”

De Maack said conclusions on 2016’s financial markets’ trajectory cannot be made yet but he explained the divergence between monetary policies will widen further. Euro zone might be preferred because of cash inflows provided by the ECB.

DNCA’s management spokeperson has also foreseen there will be “a historical decoupling of US and European bond markets, probably with opposite and simultaneous measures.”

“That has never happened before. We have to keep in mind that European and US bond markets are closely linked (re. the recent pressure on long-term interest rates), and no one can really predict how the European yield curve will react in relation to the US curve. This will probably also be a key issue in 2016.

“The ECB will do everything in its power to prevent the situation from getting out of hand in the bond market, and especially in terms of financing costs for European economies. It is also reasonable to believe that Europe could still be the best investment area in the future. Even so, the institutional and political risk in Europe still persists, even though it is somewhat lower.

“As good example of this is the British referendum on whether or not it should remain an EU member and the recent tensions within the Portuguese government,” De Maack pointed out.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco.

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