Investment Desk Bulletin

31 May 2016

Revisiting G2: Yellen yelling and Eurozone recuperating

IDB 01 06 16

By London & Capital

- This week’s IDB revisits Central Bank policies and interest rate expectations within the US and Europe. We outline why we expect further increases in US rates, but don’t expect QE in Europe to end any time soon.

- Market expectations for US interest rates increases have been fickle this year. The year started with investors expecting several hikes in 2016, but after the slump in markets during January and February, the market implied probability of any hikes in 2016 had fallen below 20%.

- London & Capital has consistently forecast at least two US rate hikes in 2016, and in recent weeks the market has reverted to a similar consensus. The Fed looks likely to hike for several reasons; financial market volatility is contained, growth fears have receded, the labour market remains strong and deflationary risks are now low.

- In Europe, we believe the European Central Bank (ECB) will continue to keep its foot down on the QE accelerator. Levels of growth and confidence have stabilised and the labour market is now improving, but recovery is far from complete and risk of deflation remains high.

- We expect market rates and policy expectations to remain volatile, this confirms our view that portfolios should stay cautiously positioned, with defensive equity risk and selective fixed income exposure. 

Please click here to view the presentation.