Global weekly: As the world turns

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Worries on China and the US recede, while uncertainties around the UK and European peripheral countries resurface.

Bond markets update

After a few years of good performance, government peripheral bonds from Portugal and Spain are weakening, now that uncertainties are growing. This month, we may see whether Portugal will remain eligible for the asset purchasing programme of the European Central Bank (ECB). The country may face a further rating downgrade soon and as such, fall out the asset purchasing programme. In addition, Portugal, as well as Spain, still needs to form a government. New elections almost seem inevitable, and increasing political populism and anti-European sentiment thus remain a threat.

The sentiment can be negatively influenced by renewed tensions around Greece and the UK. Last week, struggles appeared between the Greek government and the International Monetary Fund (IMF) on their debt package renegotiation. In the UK, tensions increase as the ‘Brexit’ referendum comes closer. The referendum on the UK leaving the Eurozone will be held on 23 June. Luckily, the spread of Spain and Italy with Germany came down this week.

For a few years, peripheral bonds have performed exceptionally well. By illustration, the Italian 10-years interest rate came down from 7.1% to 1.4% now. Ever since the pledge of ECB President Mario Draghi to do whatever it takes, peripheral bonds have enjoyed the protection from ECB’s safety net, the Outright Monetary Transactions (OMT). The asset purchasing programme of the ECB took away further uncertainties as to whether the bank would buy peripheral government bonds at all.

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