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10/14/2010 / FLASH / FOREIGN EXCHANGE - INTEREST RATE DERIVATIVES
Press conference: FIM research analysts share their outlook for the markets
On October 12, the Fixed Income Markets (FIM) research team held a breakfast press conference at the Plaza Athénée hotel in Paris to discuss the following topics: 'Regional convergence and global divergence', 'Eurozone Macro and Fiscal Outlook - Uneasy policy mix', 'Will the USD sink if QE2 is launched?', 'The case for EMU yields convergence' and 'No miracles: emerging markets growth is back... so are imbalances.'
Hervé Goulletquer, Head of FIM Research, opened this conference by explaining that “poor visibility on the global economy and the unstable outlook are fueling volatility on the markets today. We are seeing a bout of pessimism in developed countries, even though there are real signs of growth, albeit not that strong.” He went on to discuss two other points: risk aversion, which is the driving force behind the crisis to some extent, and asset allocation, with expected returns still attractive for emerging markets and commodities.
Frédérik Ducrozet, Eurozone Economist, explained: “Europe is going through a transition and is struggling to find the right policy mix. In fact, Europe is currently caught in a paradox: Germany’s growth is driving European expansion, but monetary policy cannot be normalised while the southern Eurozone countries remain stuck in a challenging economic situation.”
He went on to give more details about Germany’s economic ‘miracle’, which is making a major contribution to rebalancing and expanding the Eurozone economy. “We are seeing a major divergence with other European regions such as Spain, Ireland and Greece, which are experiencing a painful adjustment period marked by over-indebtedness and excessive lending. The ECB wants to help iron out these differences so that those parts of Europe can find a new economic model.” He then explained that the Euro would need to depreciate to facilitate Europe’s economic adjustment. He concluded by saying that all Eurozone countries are on track with, or ahead of, the targets for reducing budget deficits.
Daragh Maher, Deputy Head of Global Foreign Exchange Strategy, explained that we are still in an economic environment where it is hard to pinpoint the “least worst” G10 currencies. For the time being, fundamentals seem to be working against the dollar. However, he advised us to be cautious about the outlook, as there are very significant differences between the short and long term. He concluded that: “the foreign exchange markets’ fascination with the debate on the second round of quantitative easing (QE2) provides a distraction from the ongoing turmoil in the Euro sovereign debt market.”
Luca Jellinek, Head of European Rates Strategy, focused on European credit trends: “Money-market rates are now at an all-time low and are set to stay there for a long time. However, we are seeing an increase in sovereign bond issuance and the uncertainties over its long-term impact are not enough to keep yields low.” Lastly, he explained that “the European crisis has helped us find out more about the European banks, particularly through the stress tests.”
Sébastien Barbé, Head of Emerging Markets Research and Strategy, wrapped up the conference by saying: “we are witnessing a gradual recovery in domestic demand in emerging markets. The outlook for the next two years is upbeat, with growth set to continue, as these countries do not suffer from fiscal deficits. In fact, most of their governments have significant fiscal leeway. What’s more, the banking systems benefit from substantial liquidity that can underpin the recovery.” He explained that risk aversion has only increased slightly, household debt is not high, and unemployment rates have fallen faster than expected – all factors that will support consumer spending. Comparing regions, Asia is the best performer. As for currencies, we need to factor in the impact of the central banks’ more stringent policies. He ended by saying: “Emerging countries will contribute to the global economic revival, but we can’t expect miracles.”
Regional convergence and global divergence, by Hervé Goulletquer
Eurozone Macro and Fiscal Outlook - Uneasy policy mix, by Frédérik Ducrozet
Will the USD sink if QE2 is launched?, by Daragh Maher
The case for EMU yields convergence, by Luca Jellinek
What about QE2? by Luca Jellinek
No miracles: emerging markets growth is back... so are imbalances, by Sébastien Barbé