Global weekly: Fears recede

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ABN AMRO Private Banking, Expertise, Private Lending, Business

The fears that had gripped markets since the beginning of the year are gradually receding. Equity markets are recovering in line with commodities, oil prices and a reduction in volatility. The bond market also perked up, as investors moved into riskier segments.

Economic data continues to be mixed and, in some cases, more disappointing than expected. The ABN AMRO Global Investment Committee believes that there are two sources of relief to the malaise: consumers and policymakers. The consumer holds the key to development of the world economy. Low oil prices will support consumer spending, which, in turn, will reduce inventories and lead to higher output. A fundamental stabilisation should be on its way, given that global demand is growing faster than world output.

Central banks will return to centre stage starting next week and are expected to continue to support growth. The ECB meets on 10 March and the US Federal Reserve on 13-14 March. The ECB is expected to keep its commitment to improve financial conditions. Further monetary stimulation is expected. Given a sense of exhaustion about the effectiveness of the ECB’s monetary policies, there is also the possibility of a new stimulus setup.

The base case of ABN AMRO Group Economics is that the ECB will cut its deposit rate by 20 basis points in March and by another 20 basis points in June, with measures to cushion the blow for banks. A tiered deposit rate system and even longer duration refi loans are believed likely. In addition, monthly asset purchases are expected to increase by EUR 10 billion a month and for the programme to be extended until June 2017.

In the US, the central bank is expected to keep rates on hold throughout 2016. While the domestic situation may support an increase in rates, global considerations are believed to outweigh a hike any time soon.

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