Comments on ECB meeting and global fixed income themes from Blackrock

Marilyn Watson - Head of Global Fundamental Fixed Income Strategy - BlackRock -

Global economic activity indicators over the past few weeks have continued to point overall to more synchronised global growth and we continue to see the prospect of central banks moving away from incredibly loose monetary policy stances.

Meanwhile, although political events have dominated news headlines, including the prospect for increased protectionism driven by the US, the impact on financial markets has been much greater on stock markets than bonds.

Today, the ECB kept its monetary policy stance unchanged, including the deposit rate at -0.4% and monthly asset purchases of €30 billion through to the end of September. In our view, the central bank will finish its QE programme by the end of this year and may start to raise key interest rates in 2019 – we will look for signs from the ECB on the timing as the year progresses.

During the press conference, President Draghi highlighted last year’s strong economic growth. He noted that the ECB expect GDP growth to remain solid and broad-based, even with the moderation in activity indicators seen so far this year and suggested this may partly be due to a pull back from high levels as well as temporary factors.

Among other comments, Draghi noted concerns over international relations and the negative implications of potential international tariffs, including the impact on confidence. He also said that the strength of the euro was not discussed by the committee.

In Sweden, the Riksbank struck a dovish tone today in its monetary policy decision. It retained the -0.5% repo rate and pushed out its assessment of when this may rise towards the end of the year. Governor Stefan Ingves commented that a move away from Sweden’s very loose monetary policy stance requires evidence of stronger underlying inflation pressure, despite strong economic fundamentals. We have a small long position in the currency.

Elsewhere in Europe, in the UK we are short or underweight duration and have been actively trading the British pound both in cash and option format on volatility in the currency. While the Bank of England will want to keep its options open as uncertainty around Brexit negotiations continues, we believe that with inflation still running above the 2% target (at 2.5%[1]) and some positive economic fundamentals including a tight labour market, the BoE will increase Bank Rate this year above the current 0.5%. The next monetary policy announcement will be on 10th May.

In the US, economic data releases have continued to be strong overall and the tax cuts along with other potential fiscal stimulus measures are likely to provide further support for economic growth this year. We expect the Fed to continue to raise interest rates on a steady, well-signalled path and currently like holding the front end of the US treasury curve as well as inflation-linked bonds.

Finally, we hold a wide range of diversified positions in corporate bonds, securitised assets and emerging market debt. In emerging markets, some of our favoured positions include Indonesia, Brazil and Argentina.

 Marilyn Watson – Head of Global Fundamental Fixed Income Strategy – BlackRock