The European Investment-Grade Fixed income team at Pioneer, lead by Tanguy Le Saout, Head of European Fixed Income, Executive Vice President, talked last week about certain developments in the fixed income markets to keep in mind in the short term:
1. Inflation – Down Down, Deeper and Down
Perhaps the reason that global bonds initially rallied was that the Renminbi (RMB) move was seen as a global deflationary move. A weaker RMB (and other Asian currencies) should mean weaker commodity prices, and lower U.S. and European import prices. However, oil is probably the main driver behind some of the big moves in the inflation markets. This week West Texas Intermediate (WTI) fell to a 6.5 year low. The reason? In our opinion, not so much a lack of demand, but rather a surplus of supply. The International Energy Agency described global oil supply as growing at “breakneck speed”. Coupled with modest demand growth, the situation might suggest further downward pressure on the oil price before a bottom is found. Little wonder then that inflation breakevens globally are falling back towards recent lows. The market appears to be moving away from expecting a pick-up in inflation, to expecting falling inflation again. That could happen in the short-term, but longer-term we believe inflation will move higher.
2. Greece and the ECB – “Hello, Mr Draghi, my old friend”
Former British Prime Minister Edward Heath once remarked that “a week was a long time in politics”. What an apt description for the week that Greek Prime Minister Alex Tsipras has enjoyed. Firstly, encouraging noises are being made about concluding negotiations on a third bail-out package in time to meet the next repayments to the ECB on 20 August. Secondly, the fiscal targets being set in this package appear to be considerably easier than initially suggested. Thirdly, and probably most surprisingly, Greek Q2 2015 GDP was reported as a stronger-than-expected +0.8%, as opposed to consensus expectations for a fall of 0.5%. So it is worth asking exactly when Greek bonds might be eligible for the ECB’s QE bond-buying programme? The ECB would have to reinstate the waiver of the minimum rating criteria for Greek government debt. However, that could come potentially as soon as European Stability Mechanism approval of the first tranche of loans. Could you have imagined back in early July that the ECB might be buying Greek government bonds by the end of 2015? No, us neither.
3. What’s happening to the Swiss Franc?
In all the excitement about the Chinese RMB movements, not much attention is being paid to the recent surprising depreciation of the Swiss Franc. Following the surprise abandonment of the floor against the Euro back in January 2015, the Swiss Franc had settled around the 1.05 level against the Euro. But in the last few weeks, it’s fallen about 4% to a level of 1.09. Perhaps the resolution of the Greek situation has led to some reversal of safe-haven flows. Or maybe, the Swiss National Bank is quietly intervening in the market. And one thing we on the European Fixed Income Investment-Grade Team have noticed is that liquidity is quite scarce in the Swiss Franc, as investors have struggled to understand the Swiss National Bank’s currency policy. Therefore, intervention would have a bigger impact in an illiquid market. Either way, for the moment, it’s a currency that we prefer to watch rather than trade.