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ECB manager reaction: brace for volatility

ECB manager reaction: brace for volatility

The European Central Bank (ECB) has kept eurozone interest rates, along with its bond-buying stimulus, unchanged following its latest meeting.

Despite an unchanged policy, the euro soared to over $1.20 as Mario Draghi promised the bulk of QE decisions to be released in October.

In the lead-up to the latest meeting, investors commented that it had put the market in a dangerous position, while others said a decision to taper would inflict extreme pain on the market.

Here Citywire Selector gathers insight from bond managers on what’s next for the market.

Citywire + rated Iain Stealey, who runs the JPM Global Bond Opportunities fund with Nick Gartside and Bob Michele, said Draghi is biding his time, as he waits for the exchange rate to play out before they decide how to taper.

'Maybe more interesting, he continues to say that they don't have a scarcity issue. I think we will have to wait and see on that. Most people perceive that by the summer of next year, they might do.

'They do have concerns regarding inflation; you can see that in the projections. Draghi acknowledged that the exchange rate is not a policy tool but is important as we all know, something that they will be monitoring.

'The euro continues to rally, so he didn't do enough to talk it down. If that continues to go, it is going to cause more headwinds for them later as it obviously continues to bring down their inflation expectations. Most people considered that he would be pushing the announcement out to October. We would have to have a dramatic change of events for that not to occur.'

Citywire + rated Jorgen Kjaersgaard, who runs the AB European Income Portfolio, said investors should be selective when dialing up credit risk in Europe and that despite no changes to guidance positions, investors should position their portfolios for volatility.

'Consider taking an overweight position in European financials. Many European banks have significantly deleveraged their balance sheets, improved asset quality, and would likely benefit from potentially higher interest rates and a steeper yield curve in Europe.

'We favour the Additional Tier 1 bonds of the most recapitalised banks, where fundamentals are strong and valuations still look attractive.
Although valuations in European credit have become less compelling overall, we still see pockets of opportunity.

'These include bonds issued by select European capital goods companies which still offer an attractive yield—while the underlying businesses are poised to benefit from Europe’s better growth momentum.

'Focus on select opportunities in the GBP space concentrating on financials and companies with international income streams as these could be diversifiers in a EUR rate rise environment.'

Mark Nash, who manages the Old Mutual Global Bond fund with Nick Wall, said Draghi had been a touch on the dovish side.

'Draghi didn't give too much away. He kept his cards close to his chest. No real changes to interest rates or the current programme or sequencing.

'What he did do was recognise that financial conditions, although they are ok, are a bit tighter due to the strength of the euro and on the back of that they did revise down the inflation forecast. They did recognise that the currency had changed things somewhat and was quite upbeat about the growth situation.

'Although the euro had potentially slowed things, he was pretty positive about inflation coming up to target over time, which was significant. Globally, people are talking now that inflation is essentially broken, it is going to stay low – he was  saying demand is there, the output gap will be eroded and wages will start to rise and inflation will get back to target. Although he is cautious at present because of the euro, he is positive that inflation will go up over time.'

Sandra Holdsworth, who co-manages the Kames Absolute Return Bond Global fund, said that Draghi's statement reflected the current positive environment in the market. 

‘Inflation however is revised slightly lower for 2018 and 2019 reflecting for the first time some pass though from the strength of the Euro.

'The revisions made were quite small signalling that at this stage the ECB is not too concerned over the external value of the currency, although there was some note of Euro volatility in the accompanying statement.

‘We continue to expect tapering to start in 2018, and think that some change in the composition of asset purchases is likely given the ‘shortage‘ of German government debt. In our view this will add to the relative attractions of peripheral European debt, already performing well as the outlook for the Eurozone economy continues to improve.

As long as there is no political hiccup the better economic outlook will continue to benefit credit ratings across the region with most countries in the periphery likely to retaining a stable or positive outlook.’

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