latamen
Easing does it

Easing does it

10-06-2019 | Insight
Market expectations for central bank policy rates have come down substantially, following continued weakness in global economic conditions and the rift in the trade talks between the US and China. The market is now braced for central banks to pursue a more accommodative policy. We expect central banks to deliver.
  • Rikkert  Scholten
    Rikkert
    Scholten
    Portfolio Manager
  • Bob Stoutjesdijk
    Bob
    Stoutjesdijk
    Analyst
  • Martin van Vliet
    Martin
    van Vliet
    Analyst

Speed read

  • The Fed is turning the corner
  • No final act from the ECB’s Draghi – yet
  • Easier Chinese policy

The RBA and RBNZ already cut rates and we expect the Fed to follow soon. If central banks don’t listen, the market will probably force their hand.

With the expected lift-off in Europe and Japan taking a full reversal over the past months, the US and dollar-bloc are more or less the only developed government bond markets where some positive yield is left. This provides a backdrop where any rise in government bond yields will probably be seen as a buying opportunity. This makes us constructive on duration.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Fed still has opportunity to get back ahead of the curve

The Fed has two choices: either cut soon to satisfy expectations (either 50 bps in one go, or 25 bps cut in June and July), or wait and risk a tightening of financial conditions as risk assets sell off. This Fed appears less in tune with markets than its predecessors, so there is a risk that it could remain behind the curve. This is not our main scenario, though. We think the Fed has learned from the December episode and will cut rates convincingly. If not, they will likely have to cut more later.

ECB signals that further policy easing is state-contingent

ECB President Draghi delivered a dovish message at its latest meeting, albeit failing to fully live up to the dovish market expectations that had been built.

Financial markets have priced out some 3 bps of the rate easing since the news conference. Our view is that it makes sense for markets to keep pricing in at least a 50% probability of a 10 bps cut by year-end. For choice, we think the hurdle for the ECB to deliver that is lower than for a resumption of QE – which only becomes more likely if a broad-based recession were to take hold. In our view, a rate cut would likely be accompanied by measures to mitigate the side-effects of negative interest rates on the banking system, such as a tiered reserve system.

More, broader-based easing may be forthcoming in China

The monetary easing in China so far this year seems to have been mainly targeted at easing financial conditions for POEs/SMEs. While financial markets discount pretty much unchanged interbank repo market conditions over the coming year, we see risks as skewed to the downside. Against this backdrop, we remain positioned for a further weakening of the CNY, which, despite the recent widening of rate differentials, has held at around 6.90 versus the USD.

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree