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March 2015 – Monetary Easing: Who’s Next?



Last month we noted that thirteen central banks had eased their monetary policy since the beginning of the year. In February, the trend remains and the number has grown to twenty central banks for 2015. Yet, we see some strong divergences across central banks and regions.


The Israel Central Bank joined the central bankers’ party as it cut the interest rate by 0.15% to 0.10%. This decision to reduce rate is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability.


In Europe, Greece is temporarily out of the spotlight with an agreement finally signed. The Hellenic government and the European finance officials agreed to a four-month bailout extension to solve the country’s financial woes. Greece committed to a number of reforms while the ECB agreed to accept again Greek government bonds for its refinancing operations. With the bailout extension, the chance of a Grexit remains low in the near term.


Attention is now being paid to improving economic data in the euro zone. The economic recovery has been stronger so far than it had been expected last quarter. Decline of the euro and a much lower oil price provide a brighter environment. Sentiment, as measured by the Economic Sentiment Indicator of the European Commission, rose in February for the second consecutive month (-6.7 vs -8.5 in January 2015). Nevertheless, lending to households and firms is still very weak in many member states or the euro zone and has not risen since July 2012.


Meanwhile, the battle against deflation is still on the central bankers’ minds. The next ECB Governing Council meeting will release practical execution of its asset purchase programme with actual buying starting this month. As ECB is not likely to change its policy in the foreseeable future, a market rise in long-term bond yields is not on the agenda either. In the meantime, ten-year Italian and Spanish yields recorded new historic lows, the German benchmark yield also marked a new all-time low at 0.28%.


In the US, looking at Janet Yellen’s latest testimony, it is notable that the Fed believes it has made enough progress toward achieving its mandate and is now focused on making an assessment as to whether there is enough evidence that the committee should raise rate or not. The Fed is switching from forward guidance to data dependence and a first rate hike could happen during the FOMC meeting in June 2015.


The recent Fed communications suggest the committee retains a high degree of confidence on the outlook for growth and its positive effect on labour market conditions – Janet Yellen said that “considerable progress” has been achieved in the recovery of the labour market. Low oil prices also gave a boost to growth and employment.


The Fed will not only watch US data carefully, but also keep an eye on the turnaround in growth and inflation in the euro area and Japan. The effect of a stronger dollar on import prices and producers’ prices creates more uncertainty in the outlook for inflation.


After seven months of losses, oil finally rose in February. After dropping by 60% to nearly $45 a barrel in December, Brent Crude Oil has rebounded and gained 18.10% in February. Supply disruptions in Iraq and Libya have offered some support to the price as poor weather delayed deliveries. Besides, Saudi Arabia’s oil minister said oil demand was growing and according to the flash HSBC/Markit Purchasing Managers’ Index, Chinese factories are producing more than expected.


As China is the world’s second largest oil consumer behind the US, even small changes in Chinese demand can move oil prices. Besides, US shale gas producers announced capex reductions.


The Russian ruble has recorded its biggest monthly gain since the early 1990s amid higher oil prices and an improvement in the geopolitical situation in eastern Ukraine with a ceasefire agreement, reducing the risk of further sanctions. The currency climbed 11.50% in February to 61.7 against the USD. This rise comes after the ruble lost about 40% of its value against the dollar last year with a peak of volatility in December.


Investor appetite for high yield debt has rebounded in the past month. The High Yield market gained 2.28% in the US and 1.71% in Europe in February. Stronger oil prices and better liquidity helped draw billions back into the asset class, implying a surge in inflows.


February was a strong month for American and European equities, the EuroStoxx 50 rose 7.39% and the S&P 500 gained 5.49% reaching an all-time high. Emerging market equities rose 2.75% in February. The MSCI India Index continued to perform well, up 1.69% (+7.58% YTD) and the more commodity dependent countries regained from the rise of oil prices. Russian equities gained 21.24% in February, still 33% below its June 2014 level when the oil price drop started, and Brazil gained 1.26% (-4.55% YTD).


We continue to have a constructive view on equities as still abundant liquidity and a continued expansion in the U.S. economy should benefit risky assets. Divergences across Central Banks as well as uncertainty associated with the timing and pace of the Fed rate hikes are likely to favour higher volatility. We also believe liquidity should remain ample as monetary policy seeks to do battle with falling prices. This environment is creating divergences but also opportunities. In that context, risk-management combined with rigorous sector and geographical selection will remain key factors for investment performance. As usual, don’t hesitate to contact us to discuss our investment views or financial markets more generally.

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