Global weekly: End of a so-so quarter

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ABN AMRO Private Banking

The first quarter of 2016, which started so poorly, is ending with a sigh. A relief rally has not quite managed to return stocks to where they started the year and bond markets remain mixed.

This week, Federal Reserve Chief Janet Yellen was surprisingly mild in her remarks regarding future rate hikes. She described the US economy as “somewhat mixed” and expressed doubts regarding the outlook for inflation. She is recommending a cautious approach to rate hikes. ABN AMRO Group Economics expects rates to remain on hold in 2016. Even if a hike would occur, it is not bad news. Instead, it would mean a global improvement in economic conditions and a more positive environment in the US.

The monetary stimulus measures announced by the European Central Bank (ECB) in March will begin to be more fully felt in the summer. If deflation remains well below the ECB’s comfort level, the central bank will be expected to do more. It is clear that central banks are continuing to play a key role in market developments.

Bond market update

Bond markets remain mixed. Core government bond yields remain very low, with ten-year Bunds at around 0.15%. Yields declined after Yellen’s speech this week. The ECB’s supportive monetary policy has helped credit spreads and issuance is increasing in response to the ECB beginning to buy corporate credits of non-financial companies. Bond markets appear to be expecting inflation to rise, especially in the US, with inflation expectations moving in line with oil prices.

Helped by central banks, the prices of riskier bonds were able to continue catching up with government bonds during the first half of March. In the second half of March, all bond markets performed well as yields fell across the board. The credit bond market in Europe received a positive impulse from the ECB’s decision to buy corporate bonds as part of its asset purchasing programme. Most segments of the bond markets returned between 1.5% and 2.5% in the first quarter, with only inflation-linked bonds disappointing, given low oil prices and negative inflation data.

Although bond markets ended the first quarter on a positive note, the lessons of the full quarter cannot be ignored. Sentiment is vulnerable and seems to require ever more aggressive central bank action. Other policy options, such as tax cuts or government spending, are simply not yet on the table. With political tensions in Europe likely to increase over the next few months, uncertainty and volatility are calling for diversified portfolios. While we remain comfortable with positions in peripheral government bonds (inflation-linked bonds) and in European corporates (both investment-grade and high-yield), we are also continuing to explore other options.

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