Trésorier/Treasurer magazine - N°84 - Jan/Feb/Mar 2014 - (Page 20)

FORUM Generali Investments Europe's dedicated macro-research team take stock of the latest developments on the European financial markets and share their view on what might be coming. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE - N°84 - JAN / FEV / MAR 2014 Over the last four weeks, financial market developments were dominated by the intense fiscal battle in the US and the weaker macro data flow the partial government shutdown has brought about. However, despite a notable loss of economic momentum in the US, financial markets did well. Not only did the main stock markets register another handsome gain, both public and private credit spreads continued to tighten. What is more, even core government bond markets rallied as yields fell further from the highs marked at the peak of the tapering debate in June. 20 We attribute the positive market performance to the decline in political risks during the month. Not only was a (technical) debt default in the US averted, political risks in Europe have also fallen. Critical in this respect was the confirmation of the Letta government in Italy. However, even more important - and perhaps counterintuitive at first glance - was the softer macro data flow in the and elsewhere. This has led markets to expect an accommodative monetary policy stance for longer than anticipated before. Expectations of Fed tapering (which was widely expected in September) has now been pushed back into late Q1 2014. Perceptions about monetary policy will probably continue to set the tone for markets during the coming weeks. In this respect, we believe that the shutdownrelated distortions in the data flow (reduced visibility, lower sentiment etc.) are likely to keep perceptions about delayed tapering alive. So unless incoming data signals were to change from 'soft' to 'weak', all asset classes are likely to continue to benefit from the ultra-loose policy stance of the Fed. Looking beyond the period of a murky US data flow, much will depend on the strength of the incoming signals. In this respect, we anticipate a repeat of the pattern seen over the previous three years, when growth scares proved temporary. We maintain our view that due to a combination of a lower fiscal drag, rising external demand, still favourable financial conditions, and lower energy prices, the US economy will accelerate again over the turn of the year. Until then, changing 'taper on/taper off' moods will lead to a more volatile market environment. Possible market corrections will depend on the extent of the rally induced by central bank liquidity before. The more risky assets will rise without an accompanying improvement in macro fundamentals, the thinner the ice will get. Once the US economy regains traction and the Fed starts to signal reduced bond purchases, investors should brace for interruptions in the secular upward trend in markets. However, with the notable exception of core government bonds, losses should prove contained and temporary in nature. In the Euro area, the rise in business confidence came to a halt. The composite PMI receded to a reading of 51.5, still in expansionary territory. A breakdown by sectors shows that services sentiment suffered while the mood in the export-oriented manufacturing sector continued to advance. The same pattern could be observed in the EC survey but here overall sentiment advanced further.

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INTERVIEW Martin Sadleder- Treamo Business Consulting

Trésorier/Treasurer magazine - N°84 - Jan/Feb/Mar 2014