Stephen Burns

Palisade Real Assets has announced the acquisition of Eco2 Management Services Limited (“EMSL”), a UK-based renewable energy asset management and development company.

The acquisition accelerates Palisade Real Assets’ energy transition investment ambitions in the United Kingdom and Europe and will underpin a dedicated Bioenergy Platform focused on anaerobic digestion assets and adjacent infrastructure.

Stephen Burns, CEO of Palisade Real Assets, said “embedding the asset management and development capability of the EMSL team into the Palisade Real Assets investment team will help drive high quality deal flow, enable operational value creation on complex assets that have multiple value propositions and ultimately deliver better investment returns for our investors.”

The Bioenergy Platform will own and operate anaerobic digestion assets that capture and convert energy from organic waste into efficient heat, electricity and transport solutions. It will aggregate bioenergy infrastructure assets – in what is currently a fragmented sector – to build a bioenergy enterprise.

The best-practice EMSL operational and feedstock management capabilities will be key to the delivery of strong and stable investment returns, and positive environmental outcomes. EMSL has a team of over 50 people and a 20+ year track record of managing high-performing renewables assets through concept, development, construction and operations.

“We see the decarbonisation of the waste, heat and transport sectors as key challenges for governments globally in achieving net zero emissions targets. The Bioenergy Platform’s investments in anaerobic digestion will be a valuable part of the decarbonisation toolkit for these sectors.”

“We have identified a significant pipeline of investment opportunities across the anaerobic digestion value chain, with the first major transaction for the Bioenergy Platform expected to be completed in the coming weeks.”

Darren Williams, CEO of EMSL, said “we are thrilled to join the Palisade Real Assets team. EMSL provides best-in-class asset management services to clients to ensure that their assets perform better and increase in value as a result of our active involvement.”

“Combined, the team will bring extensive real asset investment and operating experience across geographies and technologies to investors in the Bioenergy Platform.”

The post Palisade Real Assets acquires Eco2 Management Services appeared first on AdviserVoice.

Although some hard data have been weak, December survey data suggest that the euro area ended 2015 on a firm footing. Shaking off weakness in France (partly related to the November terrorist attacks), the composite Purchasing Managers’ Index (PMI) matched its high for the year, while the broadly based economic-sentiment indicator (ESI) reached its highest level since April 2011. Moreover, the services component of the ESI was at its highest since October 2007, highlighting the domestic nature of the recovery.

Sustained recovery

Helped by low oil prices and an increasingly supportive monetary/fiscal policy mix, we expect the recovery to continue in coming quarters. Our latest forecast (1.7%) is for growth to be a touch higher this year than it was in 2015 (1.5%). There are arguments for stronger growth, especially with fiscal policy turning overtly expansionary across the region (Display 1). But the recovery still faces important headwinds, not least in the form of weak emerging-market growth. Until the external backdrop improves, it’s difficult to see a material acceleration in the pace of euro-area growth.

Subdued price

Pressures Inflation ended 2015 on a soft note, with the headline rate unchanged at 0.2%. There are two main reasons for this. First, renewed weakness in the oil price means energy prices continue to exert significant downward pressure on inflation (knocking 0.6 percentage points off the headline rate in December). Second, while the economy is recovering, growth is not yet strong enough to generate sustained upward pressure on core inflation.

Unless the oil price continues to fall, base effects should push headline inflation higher over the coming year (Display 2). But with the recovery eating only slowly into abundant spare capacity and global price pressures weak, lifting core inflation won’t be easy. All the more so, with the impact of a weaker euro on core goods price inflation starting to fade (Display 3, next page), and with service price inflation—a key gauge of domestic inflation pressure—anchored close to record lows.

More monetary easing

For the European Central Bank (ECB), weak headline and core inflation are equally problematic. The former has been below 0.5% for 18 months now. And the longer it stays there, the more worried the ECB is likely to become about a possible “unanchoring” of inflation expectations.

But even if the headline rate starts to rise, confidence that it will stay there—a key condition for ending the ECB’s asset purchase program—will only be possible if it’s accompanied by a decisive increase in core inflation. And barring an unexpectedly strong pickup in growth or further sharp drop in the euro, that doesn’t look likely. That’s why we expect more monetary easing in 2016, helping to anchor bund yields and providing further support for peripheral bond markets.

Challenges and risks

Our central case is therefore that the recovery continues in 2016, but that growth isn’t strong enough to generate a sustained increase in core inflation. In which case, the ECB will probably ease policy further.

As usual, there are a number of risks to this view. The most important of these would be a hard landing in China. The resultant economic and financial shockwaves would weigh heavily on euro-area growth, triggering a more forceful policy response from the ECB.

Domestically, the main risks are political. While no major elections are scheduled this year, political fragmentation is now a fact of life in most euro-area countries. This has led to an unstable, left-wing coalition in Portugal and is complicating the task of putting together a viable government in Spain. At the same time, Greek risks lurk in the background and the euro area would not be unaffected should the UK vote to leave the European Union. Add to this another influx of migrants/refugees from the Middle East, and it’s clear that, even if the euro area is on a firmer footing, challenging times still lie ahead.

By Darren Williams, Senior European Economist, Global Economic Research, AB

——–

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates. This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is intended only for persons who qualify as “wholesale clients,” as defined in the Corporations Act 2001 (Cth of Australia) or the Financial Advisers Act 2008 (New Zealand), and should not be construed as advice.

The post The Euro area in 2016: Solid growth, low inflation, easier policy appeared first on AdviserVoice.

With sluggish emerging-market growth damping the stimulus from a weak euro, the euro-area recovery is unusually dependent on consumption. Fortunately, recent data suggest the consumer revival is still on track and we think there are good reasons to expect the positive trend to continue.

This is true even though data released this week showed car registrations tracking sideways in the second quarter. In our view, this should be seen in the light of the strong gains posted in the previous two quarters, when registrations rose by a combined 6.6%. Not to mention the fact that June’s reading was the highest since December 2011 and 18% above the low reached in January 2013 (though still 23% below the precrisis peak).

In addition, retail sales remain on a steady upward track, with the April/May average 0.6% higher than in the first quarter. All told, we expect consumer spending to post another solid gain of 0.5% in the second quarter. If this is correct, it would push annual growth up from 1.7% in the first quarter of the year to 1.9% in the second—the fastest growth rate since the third quarter of 2007 (Display 1).

Not Just About Oil

It’s tempting to assume that the recent pickup in consumer spending is all about oil. But it’s not. Clearly, the lower oil price has been an important factor in recent months, helping to propel real wage and salary income growth up to an annual 3.0% in the first quarter, very close to the precrisis high (Display 2). But the turning point for consumption happened long before the collapse in the oil price. And it was underpinned by a recovery in nominal wage and salary income growth, which has risen from 0.5% in the first quarter of 2013 to 2.7% now.

The bulk of this improvement has been driven by a turnaround in employment growth—contracting at an annual rate of 0.9% at the beginning of 2013 but rising by 0.8% now. However, there are also signs that wage growth is starting to pick up. And not just in Germany. Even in the periphery, where wage growth has been under intense downward pressure in recent years, there are signs that wage growth is finally creeping up.

Borrowing Returns

The recovery in consumer spending has also been supported by a pickup in credit growth. In the first five months of the year, consumer credit increased by €3.2 billion, compared with a decrease of €2.9 billion in the same period last year and €8.1 billion in the first five months of 2013. In annual terms, the growth rate of consumer credit remains quite soft, at 0.5% in May. But this is the fastest growth rate since March 2009 and a big improvement on the sustained declines seen in the interim.

The recent improvement in credit growth suggests that consumers have become less cautious and are finally willing to borrow again. There is strong evidence to support this in the European Central Bank’s latest bank-lending survey. Not only does this show that banks have loosened lending standards significantly in recent quarters—thus boosting the supply of credit—but also that the demand for consumer credit has shot up to the highest levels since this survey began in 2003 (Display 3).

The recent improvement in credit growth suggests that consumers have become less cautious and are finally willing to borrow again. There is strong evidence to support this in the European Central Bank’s latest bank-lending survey. Not only does this show that banks have loosened lending standards significantly in recent quarters—thus boosting the supply of credit—but also that the demand for consumer credit has shot up to the highest levels since this survey began in 2003 (Display 3).

So while the decline in the oil price has clearly provided an important boost to euro-area consumption, it’s certainly not the whole of the story. There’s also been an improvement in underlying fundamentals which should underpin consumption, and the recovery more generally, when the boost from the oil price starts to fade.

By Darren Williams, Senior European Economist, Global Economic Research, AB

———

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.Note to Australian Readers: This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is only intended for persons that qualify as “wholesale clients,” as defined in the Corporations Act 2001 (Cth of Australia), and should not be construed as advice.

The post Europe’s consumer-led recovery not just about the oil price appeared first on AdviserVoice.

Yesterday’s referendum has pushed Greece closer to euro-area exit.

Sunday’s referendum has pushed Greece closer to euro-area exit. A Greek departure would plunge the region into uncharted waters, with unpredictable consequences. But policymakers have powerful tools to combat contagion and prevent a Greek accident sending the rest of the region back into recession.

Greece has taken another big step towards euro-area exit following a decisive “no” vote in yesterday’s bailout referendum. While the referendum was not a formal vote on Greece’s membership of the euro area, it was a huge rejection of the fiscal discipline and reforms that go with it.

This means it will now be even more difficult (if not impossible) for Greece to reach a deal with its euro-area partners. In fact, it’s hard to see how Greece will avoid default on the European Central Bank (ECB) on July 20—if its banking system lasts that long.It’s still possible that Greece’s creditors will “blink”, but they’ve shown no sign of doing so thus far. In our view, they’re now likely to start working on a plan “B” to protect the rest of the region if/when Greece ends up leaving the euro.

Contagion the Key

There are three main channels through which a Greek exit could impact other countries: direct trade links; financial links; and contagion. The impact via the first two channels is likely to be limited. Greece accounts for just 1.8% of euro-area output and 0.5% of the exports of other euro-area countries. And most of the financial exposure has been transferred out of private sector hands into the safer hands of official creditors (other euro-area governments, the ECB and the International Monetary Fund (IMF). Foreign bank exposure to Greece has fallen sharply in recent years.

The main threat to other euro-area countries is therefore likely to come through the third channel: contagion. In recent years, other vulnerable countries in the euro area have taken important steps to differentiate themselves from Greece, particularly with respect to their commitment to reform. Nonetheless, the recent volatility of peripheral bond markets shows that developments in Greece can still have important knock-on effects elsewhere.

If Greece actually leaves the euro, these knock-on effects will intensify. That’s because the departure of any country from the euro area would shatter the myth that membership is irrevocable. This, in turn, would lead to a higher risk premium in other countries. Much of the time, this premium for “redenomination” risk might be quite small. But it could rise significantly—and act as a dangerous accelerant—at times of economic or financial-market stress. Fortunately, the ECB is aware of this.

Willing and Able to Act

Over the last three years, the ECB has gone to great lengths to ensure that its monetary policy is being transmitted properly to the periphery. Recent evidence suggests that these efforts are starting to bear fruit (Display). So, while we don’t think the ECB has any hard and fast targets for bond yields in the periphery, we doubt that it would stand back and let the actions of the Greek government undo all its good work—especially with the specter of deflation still lurking in the background.

The ECB’s tolerance for rising bond yields is therefore likely to be limited. And it has the tools, in our view, to prevent contagion from spiraling out of control. In the first instance, it could alter the speed and composition of its current sovereign-bond purchase program (i.e. by tilting its near-term purchases more towards the likes of Italy and Spain). In extremis, it could deploy its Outright Monetary Transactions program—or some variant thereof.

In light of this, we think any increase in peripheral bond yields following a Greek exit would be much less severe than during earlier phases of the crisis. So, while we are mindful that the euro area would be sailing into uncharted waters, we are hopeful that the economic impact would be manageable. That’s probably also the assessment of other euro-area governments. And it helps explain why they may now be willing to let it go.

The post Greece: Thinking the Unthinkable appeared first on AdviserVoice.

As widely expected, the latest meeting of euro-area finance ministers—the Euro-group—ended without an agreement between Greece and its official creditors. The mood of the subsequent press conference was somber, and hopes of a deal to avoid Greece defaulting on a payment to the International Monetary Fund (IMF) on June 30 are fading fast. Indeed, the head of the Eurogroup said that the disbursement of funds before the end of the month is now “unthinkable”.

That doesn’t quite mean Greece has reached the end of the road. As German Chancellor Angela Merkel said recently, “where there’s a will there’s a way”. If an agreement can be reached at an emergency European Union (EU) summit next Monday, there are still ways to avoid an immediate bankruptcy. But, for that to happen, Greece will have to make new concessions and, despite the high stakes involved, has given no indication that it’s willing to do so. Without Greek concessions, Monday’s summit might be as much about contingency planning as trying to avoid a default.

There are various interpretations of the Greek government’s negotiating strategy.

One is that it wants to take the negotiations down to the wire in the hope that its euro-area partners will “blink” and that it will be able to secure the best deal available (i.e. one that includes up-front debt relief). The other possibility, and one that we have long feared, is that the gaps between the two sides are simply too big to bridge.

It’s hard to know which of these interpretations is correct. Based on developments so far, there are few grounds for optimism. But we also recognize that both sides have a lot to lose and that the EU has a long history of flexible deadlines and last-minute compromises. One thing does seem clear, though. Unless euro-area leaders are willing to overrule their finance ministers (and risk losing the IMF’s involvement in the process), the main concessions will have to come from Greece.

Point of no return?

So what happens if Greece’s euro-area partners don’t blink and the Greek government doesn’t back down?

In our view, it’s then reasonable to assume that Greece will default on the IMF at the end of the month and exit its international bailout at the same time (thus losing potential access to €18 billion of undisbursed funding). It’s also difficult to see where the government would find the funds to redeem a €3.5 billion bond, held by the European Central Bank (ECB), on July 20.

In recent months, the ECB has single-handedly kept the Greek banking system afloat in the face of huge deposit outflows (Displays 1 and 2). It has done so by providing the banks with enormous amounts of emergency liquidity assistance, or ELA (Display 3). In our view, this will no longer be possible if Greece defaults on the IMF. Capital controls would surely follow (if they’re not imposed before then to stem accelerating deposit/capital flight).

This would be a catastrophic scenario for the Greek economy, which would be plunged into an even deeper recession, pushing the public finances further off course. It would not necessarily lead to Greece leaving the euro—most Greeks are in favor of the single currency, though not the reforms that come with it—but it would clearly represent a step in that direction.

The post Greece reaches the Last-Chance Saloon appeared first on AdviserVoice.

Euro-area bond yields have soared in recent weeks, with the German 10-year yield rising by 100 basis points from a low of 0.05% in the middle of April to over 1.0% at one point this week. This huge adjustment takes yields back to September 2014 levels (Display 1), long before the European Central Bank (ECB) launched its quantitative easing (QE) program. It’s also the biggest increase in bund yields over an eight-week period since the reunification boom in the early 1990s.

ECB unruffled

Perhaps surprisingly, the ECB has not been unduly ruffled by these developments. There are several reasons for this, in our view.

First, the ECB probably regards much of the recent sell-off as a correction from unsustainable levels—the result of what president Mario Draghi recently called “one directional investments”. In this respect, it’s worth noting that, before their recent rise, German yields had fallen to levels never seen at any stage in Japan over the past 20 years—despite the latter experiencing persistent deflation and negative nominal GDP growth, neither of which are present in the euro area.

Second, as noted by several ECB Council members, higher bond yields may reflect improved prospects for economic growth and inflation in the euro area—in other words, rising yields may be a sign that the ECB’s policies are working.

Third, unlike in other countries, QE in the euro area is not primarily about reducing long-term bond yields (which were already at record lows long before the launch of the program). Rather, it’s about underpinning inflation expectations and underscoring the ECB’s commitment to do “whatever it takes” to prevent the euro area slipping into deflation. If the ECB is successful, bund yields ought to rise—especially given their low starting point.

Inflation expectations start to rise

So is this what’s happened recently? We think the answer is a qualified yes. When the ECB laid the groundwork for QE last year, it attached considerable importance to declining market-based measures of medium-term inflation expectations. As Display 2 shows, these measures have started to rise again—though not back to levels consistent with the ECB’s definition of price stability, nor by as much as the rise in bond yields (a point we’ll return to).

And deflation risks start to recede

In addition, our own analysis suggests that deflation risk is starting to recede in the euro area. We can illustrate this using our deflation risk indicator (DRI)*, which peaked in the third quarter of last year but has since fallen back (Display 3).

It’s important to note that the DRI is a broad-based guide to deflation risk and that the recent improvement is not related to higher consumer price inflation (which is still lower than in the third quarter of last year). Rather, the improvement has been driven by the DRI components that are most sensitive to monetary policy: asset prices, the exchange rate, money-supply growth and the size of the ECB’s balance sheet.

Tighter financial conditions

But while rising inflation expectations and diminishing deflation risk may explain part of the recent surge in bond yields, a note of caution is necessary. As noted earlier, the increase in inflation expectations has not kept pace with the rise in bond yields, especially in more recent weeks. And this has led to higher real yields (Display 4) and de facto tightening of financial conditions.

Like the ECB, we are not yet too worried about the recent rise in bond yields. But one of the key factors underpinning our positive view on the euro-area outlook is the improvement in monetary conditions that has taken place over the last year. A premature tightening of financial conditions is not part of the script and needs to be closely monitored. Despite its calm reaction to recent market developments, the ECB is likely to have similar concerns. Its tolerance for yet higher bond yields is therefore likely to be limited, in our view.*

*The deflation risk indicator includes the following variables: three measures of inflation, the level and change in the output gap, economic growth relative to previous trend, the level and change in asset prices (equities and housing), change in the nominal exchange rate, level of the real exchange rate, bank-lending growth, money-supply growth, real interest rates and the size of the central bank’s balance sheet. See Deflation in the Euro Area: Are We There Yet? November 20, 2014 for further details.

The post Will bond markets turn too fast and furious for the ECB? appeared first on AdviserVoice.

Few investors are still unaware of the huge medium-term challenges facing the euro area—particularly the risk that it might be trapped in a period of very low nominal growth. But it’s important to realize that, this year at least, the economy is likely to benefit from powerful cyclical tailwinds.

The most obvious of these are the oil price and the exchange rate. In euro terms, the oil price is currently about 35% below its average level in the first half of last year, while the euro’s trade-weighted exchangerate index has fallen by almost 10% over the same period. Using standard rules of thumb, these two changes should add roughly 1% to economic growth in the coming year.

Real Income Boost

So far, the most visible impact of the lower oil price has been on headline inflation, which slipped to -0.6% in January. Not surprisingly, this has added to concerns that the region is slowly succumbing to deflation. But it’s important to remember that the drop in the oil price will have a positive impact on real income growth in the euro area—similar, in essence, to the fiscal impulse that would be provided by a reduction in value-added tax rates.

In the third quarter of 2014, the last period for which data are available, annual growth in nominal wage and salary income in the euro area rose to 2.3%. If, as seems likely, a similar growth rate is recorded in the first quarter of the current year, annual growth in real labor income should rise towards 3.0%. This would be close to the cyclical peaks seen in 2001 and 2006/07 (Display 1), when consumer-spending growth was considerably stronger than it is at present.

Much will depend on the extent to which consumers decide to spend or save the windfall gain from oil. It’s not certain which way they’ll swing. However, we’re encouraged by the recent pickup in consumer confidence, particularly indications that households may be more willing to make major purchases than they have been at any time since 2006 (Display 2). The theory that falling prices will encourage consumers to postpone purchases remains unproven, in our view: there’s certainly little evidence of it in the euro area at present.

Supportive Policy Mix

Importantly, these positive developments are occurring at a time when the policy mix in the euro area has become more supportive of growth. After a period of damaging austerity between 2010 and 2013, our estimates suggest that the overall fiscal stance for the region is likely to be neutral/mildly expansionary this year. Hardly the aggressive stimulus many observers would like to see, but an important step in the right direction (at least so far as economic growth is concerned).

Improved Money and Credit Dynamics

One of the euro area’s biggest problems in recent years has been the fragmentation of the single monetary policy. Among other things, this has led to companies in the periphery being charged considerably more to borrow money than those in core countries.

However, as Display 3 highlights, bank lending rates for Italian and Spanish companies have fallen sharply in recent months. Although rates are still higher than in Germany or France, this indicates that the single monetary policy is becoming less fragmented and that the monetarytransmission mechanism is starting to recover.

This is also the message from recent bank lending data. In the final quarter of 2014, net new loans to euro-area households and firms rose by €19 billion. Not only was this the best quarter since the beginning of the credit crunch in 2011 (Display 4), but the mix was also encouraging, with loans to nonfinancial companies finally starting to pick up (note that mortgage borrowing continued to grow throughout the crisis).

Recent monetary developments also point to brighter times ahead. The narrow money aggregate M1* has long been regarded as a possible leading indicator for euro-area growth. In December, real M1 growth was running at 8.0%, the fastest growth rate since May 2010. Moreover, with inflation falling steeply in January, it’s likely to rise even further in the new year. If M1 is any guide, a significant acceleration in output growth looks possible in the coming year (Display 5).

Cyclical Outlook

Brightens In recent years, much has been written about the bleak medium-term outlook for euro-area growth. We agree with a lot of this. But that doesn’t mean the business cycle is dead. In our view, the conditions for a cyclical pickup in euro-area growth are better today than they have been at any time since the onset of the global financial crisis. Against this backdrop, consensus forecasts for euro-area growth are probably too low and look set to move higher (we expect 1.5% growth this year compared with the current consensus estimate of 1.1%).

Of course, there are important caveats to consider. One relates to a possible breakdown in the bailout negotiations between Greece and its euro-area partners. However, so long as this doesn’t result in a default and/or euroarea exit, we doubt this will have a material impact on growth elsewhere in the region.

Another is that faster real growth is likely to come largely at the expense of lower prices. This means that nominal growth— the key for debt sustainability—is likely to be little changed this year at 1.8% after 1.6% in 2014. Still, this is likely to keep the European Central Bank firmly in accommodative mode—even if, as we expect, growth surprises on the upside.

By Darren Williams, Senior European Economist—Global Economic Research and Dennis Shen, Economic Associate—Global Economic Research,, AllianceBernstein

———-

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates. This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is only intended for persons that qualify as “wholesale clients,” as defined in the Corporations Act 2001 (Cth of Australia), and should not be construed as advice.

The post Euro-area growth: reasons to be cheerful appeared first on AdviserVoice.

Balance-of-payments data show that euro-area residents purchased €36 billion of foreign bonds in November. This continues a trend that started in the first half of last year and gained pace after the European Central Bank (ECB) cut its deposit rate into negative territory in June. Between June and November 2014, euro-area residents bought €200 billion of foreign bonds (Display 1). This compares with €33 billion in the same period a year earlier and is the strongest outflow since the financial crisis struck.

The chief beneficiaries of these outflows have been the US and the UK. According to quarterly data from the ECB, euroarea residents bought €77.8 billion and €37.0 billion respectively of US and UK debt securities in the second and third quarters of 2014. These two countries accounted for roughly two-thirds of all foreign-bond purchases during this period (Display 2).

QE Accelerant

Looking ahead, there is every reason to expect euro-area residents to continue buying large quantities of foreign bonds. Last week, the ECB announced that from March this year until September 2016, it intends to buy €60 billion per month of public and private sector debt securities. Moreover, it plans to do this at a time when interest rates in the euro area are already at incredibly low levels—not only is the ECB’s deposit rate negative, but so too are short-dated bond yields in core Europe.

Against this backdrop, there is little doubt that much of the liquidity injected by the ECB will flow into overseas markets. And while the US and UK might be the first ports of call, other higher-yielding markets are also likely to benefit. Quantitative easing (QE) in the euro area is therefore likely to exert considerable downward pressure on global bond yields.

Bond Flows Swamp Current Account

Bond outflows from the euro area are also likely to have implications for exchange rates. For all the region’s difficulties, the euro had, until recently, remained strong. One of the main reasons for this was a large and rising current account surplus— in much the same way that Japan’s huge current account surplus supported the yen during the 1990s.

While its strong current account position continues to represent an important source of structural support for the euro, the overall balance of payments looks much less favorable. Between June and November 2014, the euro area’s current account surplus was €147 billion, or 2.4% of gross domestic product in seasonally adjusted terms. At the same time, the region also benefited from a net equity inflow of €113 billion. However, all other components of the balance of payments showed net outflows during this period.

As Display 3 shows, between June and November last year, net direct investment in the euro area was minus €43 billion and net banking flows were also negative (to the tune of €61 billion). But the biggest outflow was via the bond channel. With euro-area residents gobbling up €200 billion of foreign bonds and overseas residents off-loading €42 billion of euro-area bonds (the strongest sales by foreigners since the height of the sovereign-debt crisis), net bond outflows from the euro area reached €242 billion between June and November last year.

In our view, the current account is likely to be a positive factor for the euro for some time to come. Moreover, an improving cyclical backdrop and weaker currency could continue to attract equity—and, in time, direct investment—inflows into the region. But with short-term interest rates negative and the ECB about to embark upon a large-scale asset-purchase program, the euro is likely to face a formidable headwind in the form of continued large bond outflows.

By Darren Williams, Senior European Economist—Global Economic Research and Dennis Shen, Economic Associate—Global Economic Research, AllianceBernstein

————-

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates. Note to Canadian Readers: AllianceBernstein provides its investment management services in Canada through its affiliates Sanford C. Bernstein & Co., LLC and AllianceBernstein Canada, Inc. This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is only intended for persons that qualify as “wholesale clients,” as defined in the Corporations Act 2001 (Cth of Australia), and should not be construed as advice.

The post Bond outflows weigh on the Euro appeared first on AdviserVoice.