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Wisdom is gained by learning from the past

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20 th May 2016
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Longer hours, warmer days: finally Greece is back in the minds of every European tourist. What we can now take for granted is that investors will need to keep an eye on Greece and its tragic bailout drama. The economic weather forecast is not sunny, the country is still flirting with mild recession, and has been since mid-2014; unemployment is at 24% and negative inflation clearly signals ongoing structural weakness. As political talks will resume on 24 May, almost every economic/financial indicator seems to show limited improvements in Greece, such that tough negotiations will be necessary once again. The ray of light comes from the International Monetary Fund (IMF), whose participation has been on hold since last year: they haven’t signed off on it yet. They have explicitly acknowledged that the debt burden on the country is too big – I add, to be repaid any time within this century - and they are now pressing the eurozone to agree on substantial debt relief packages once again.

Within the rest of the European Union there is a divergence between real-growth, which is still relatively strong at 1.5% year-on-year, and Consumer Price Index (CPI) whose forecast for 2016 at 0.2% is appalling in light of the central bank target of 2%. There isn’t much that Draghi & co. can do from here, and the idea of ‘helicopter money’, though mentioned at the European Central Bank (ECB)’s last press conference, had specifically not been on the table at the meeting itself. On the positive side of inflation, oil continued trading higher, reaching $48 on both West Texas Intermediate (WTI) and Brent, and is receiving more support from the comments of a renowned investment bank suggesting that the market oversupply problem may have come to an end. On the inflation/price stability front, the ECB is unlikely to do anything more than it has already committed to; with both Greece to negotiate and the UK EU Referendum vote to contend with, the ECB may be wise avoiding any more esoteric measures for the time being.

Despite all the efforts in the world (read ECB, in Europe), despite negative rates and tight margins, financing conditions on real estate projects in many parts of Europe are still quite difficult. According to a number of enquiries we have received in recent weeks from clients and other advisors, all lenders’ attention is dedicated to trophy assets, more so if located within large European capital cities such as Paris, Madrid, Milan and Barcelona. However, regional investment projects in France, Spain and Italy are reportedly so neglected they may never start. In contrast, issuance of new corporate bonds picked up last week, totalling c. €20bn with margins compressing significantly after the ECB’s March announcement propelled fresh investor appetite. One should also bear in mind that in June the ECB will start purchasing €20bn per month of EUR denominated corporate bonds rated above BBB-.

Italy, a country struggling with an ageing population, may soon be joining the ranks of the Methuselah bonds issuer. Following in the steps of Spain, France and Belgium, the country is considering issuing 50-year debt. This manoeuvre by the government could be the result of an unprecedented number of legal, fiscal, banking and social reforms, which are being well recognized among the Pan-European investor community; or it could be just the not- so-prompt reaction to the lowest cost of funding ever made possible to European countries. Regardless of the rationale behind them, the volatility of these ultra-long dated bonds will make for a crazy roller-coaster if rates ever move higher. European yields are expected to stay low for a long time to come, as long as there is a European market and the central bank is stockpiling assets, that is! However, the emergence to leadership of populist parties in many countries is creating nice preconditions for uncertainty and more to come on the state of the Union, with a potential negative impact on peripheral bond markets.

Reports on the UK Brexit vote are heating up. The leave campaigner, former Mayor of London Boris Johnson, decided to introduce a most bizarre argument, bringing up the grave of humanity that was the second World War, by comparing the European Union with German National Socialism. The comment did not affect EURGBP as much as when he initially declared he would join the cause. More impactful was the release of a poll mid this week showing the “remain” side well ahead, with 55% of voters paired with a low 4% undecided figure: GBP appreciated about 100 pips overnight. One would not trust pollsters in the UK after past elections, and to bring in a fuller picture, the FT-arranged poll of polls shows that most polls tend to show more balanced results (remain 46% – leave 44%) and a higher number of uncertain voters. While lost words will continue piling up, polls will keep driving intra-week market volatility.

Francesco Podesta

All views expressed here are the author’s own and are based on information and data available at the time of writing.

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