Weekly view—Central banks and Korea make for a busy week

The CIO office’s view of the week ahead.

The ECB’s chief economist, Peter Praet, hinted that there could be an announcement on the winding-down of the bank’s bond-buying programme this week rather than in July, as many had thought, with Praet expressing confidence that inflation would rise toward the ECB’s 2% target. Coming at a particularly sensitive time, with the euro area economy continuing to work through a prolonged soft patch and the new populist government in Italy still an unknown quantity, Praet’s comments stoked a sell-off in government bonds on both sides of the Atlantic—validating our bearish stance on the asset class.

Even as the situation in Argentina seemed to calm down (thanks in part to a large loan from the International Monetary Fund), Brazilian debt yields rose to their highest level since the start of this year at one stage last week as worries about the economy and the October presidential election stacked up. Having been in or close to recession for three years, investors might well begin to look at Brazil again. However, until it becomes clear that a new president will be in a position to pass market-friendly fiscal reforms, we will remain cautious. While we recognise that the fiscal position of many emerging markets has improved in recent years, we are still wary about emerging-market debt in general until the ramifications of tightening US financial conditions become clearer.

We think the lack of visibility about trade policy is the main risk to the global economy at the moment. We still think the Chinese and Americans will reach some sort of accommodation, and the lifting of sanctions on Chinese telecom giant ZTE in return for payment of a USD1bn fine and the replacement of the company’s board of directors and senior management could be important in paving the way. This week, we will be looking to the meeting between President Trump and North Korea’s Kim Jong-un to provide some good news for the markets, and any changes to the Fed’s ‘dot plots’ will also be on our radar.

 

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