The European Central Bank’s go-slow approach to monetary policy tightening is putting a wall around local bond markets against the turmoil sparked by its US counterpart.
Federal Reserve chair Jerome Powell this week shook equity and bond trading as he opened the door to faster-than-anticipated interest rate rises. It was the death knell for the so-called Fed put, the notion that central bankers would amend monetary policy to halt a severe market decline.
It is a sharp contrast with the ECB, which is not expected to raise rates until the second half of 2023, offering the euro area – and its peripheral bond markets – some degree of protection.
Certainly, European bonds have been caught up in the sell-off and key spreads have widened. Yet when compared to global peers, rates are set to remain lower as the ECB’s dovishness keeps markets in check.
That should mean a weaker euro, something officials might also welcome as a cushion to help the region weather fallout from the Fed and the Bank of England's swift rates rises.
“It is too early to talk about the ECB,” said George Saravelos, global head of currency research at Deutsche Bank. “Yes, European wage growth may rise and the ECB may lift off over the next two years. But the pressure and urgency to do so in Europe is completely different.”
A bond buffer will be welcomed by indebted countries such as Italy and Greece.
ECB president Christine Lagarde knows all too well how easy it is to rock markets, after she sent peripheral yields spiking in early 2020 with a loose remark.
While government debt yields have risen as markets brace for the removal of central bank support, German yields are up this year by only about half the amount compared to US or UK debt.
And German 10-year borrowing costs are still below zero, versus about 1.8 per cent in the US.
That reflects the policy divide, with about five Fed rises priced in for this year. While the ECB will reduce total asset purchases this year, and end its pandemic programme, policymakers have stressed that a 2022 rate rise is unlikely.
Ms Lagarde defended that position this month, one that is expected to be reiterated when ECB officials meet on Thursday.
Recent data, showing weaker euro-area economic confidence and Germany on the brink of a recession, will only reinforce the caution.
To alter the timing, bond buying would have to be wound down faster because the ECB’s guidance is that net purchases will end before rates start to rise. Such a move would have to be flagged well in advance to avoid upsetting the market.
So far, the strategy has worked. The yield differential between Italian and German debt – a harbinger of risk in the region – has widened since October on the ECB’s plans to scale down its bond-buying programmes.
It is too early to talk about the ECB. Yes, European wage growth may rise and the ECB may lift off over the next two years. But the pressure and urgency to do so in Europe is completely different
George Saravelos,
global head of currency research at Deutsche Bank
Yet it has stabilised this month and remains well below historic stress levels. A resolution to Italy’s presidential election could mean the spread will tighten.
The Fed-ECB divergence has also driven the euro down to about $1.11 against the dollar, the lowest since mid-2020. Options sentiment remains bearish, suggesting the descent could have farther to go.
While eurozone inflation reached a record 5 per cent last month, policymakers said it will slow this year. The ECB currently forecasts price growth at 1.8 per cent in both 2023 and 2024 – just below its 2 per cent target.
Some are predicting an ECB rates rise as soon as December, and money markets are also toying with that idea. Volatile swap contracts currently suggest around 20 basis points of tightening is priced for the end of 2022. While they may not be an accurate gauge, they do suggest some market participants are hedging for faster normalisation.
“I still think there is a chance the ECB is pulled into a more aggressive stance,” said Brad Bechtel, global head of foreign exchange at Jefferies. “Although we are now open for a move to $1.10, I would be a buyer down there on the back of an eventual shift by ECB.”
For now, that remains a tail risk for later in the year, and there is too much uncertainty for the ECB.
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Sheffield United 0
Red card: Jon Egan (Sheffield United)
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Director: Joseph Kosinski
Rating: 4/5
From Conquest to Deportation
Jeronim Perovic, Hurst
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The biog
Name: Dhabia Khalifa AlQubaisi
Age: 23
How she spends spare time: Playing with cats at the clinic and feeding them
Inspiration: My father. He’s a hard working man who has been through a lot to provide us with everything we need
Favourite book: Attitude, emotions and the psychology of cats by Dr Nicholes Dodman
Favourit film: 101 Dalmatians - it remind me of my childhood and began my love of dogs
Word of advice: By being patient, good things will come and by staying positive you’ll have the will to continue to love what you're doing
Milestones on the road to union
1970
October 26: Bahrain withdraws from a proposal to create a federation of nine with the seven Trucial States and Qatar.
December: Ahmed Al Suwaidi visits New York to discuss potential UN membership.
1971
March 1: Alex Douglas Hume, Conservative foreign secretary confirms that Britain will leave the Gulf and “strongly supports” the creation of a Union of Arab Emirates.
July 12: Historic meeting at which Sheikh Zayed and Sheikh Rashid make a binding agreement to create what will become the UAE.
July 18: It is announced that the UAE will be formed from six emirates, with a proposed constitution signed. RAK is not yet part of the agreement.
August 6: The fifth anniversary of Sheikh Zayed becoming Ruler of Abu Dhabi, with official celebrations deferred until later in the year.
August 15: Bahrain becomes independent.
September 3: Qatar becomes independent.
November 23-25: Meeting with Sheikh Zayed and Sheikh Rashid and senior British officials to fix December 2 as date of creation of the UAE.
November 29: At 5.30pm Iranian forces seize the Greater and Lesser Tunbs by force.
November 30: Despite a power sharing agreement, Tehran takes full control of Abu Musa.
November 31: UK officials visit all six participating Emirates to formally end the Trucial States treaties
December 2: 11am, Dubai. New Supreme Council formally elects Sheikh Zayed as President. Treaty of Friendship signed with the UK. 11.30am. Flag raising ceremony at Union House and Al Manhal Palace in Abu Dhabi witnessed by Sheikh Khalifa, then Crown Prince of Abu Dhabi.
December 6: Arab League formally admits the UAE. The first British Ambassador presents his credentials to Sheikh Zayed.
December 9: UAE joins the United Nations.
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Spain drain
CONVICTED
Lionel Messi Found guilty in 2016 of of using companies in Belize, Britain, Switzerland and Uruguay to avoid paying €4.1m in taxes on income earned from image rights. Sentenced to 21 months in jail and fined more than €2m. But prison sentence has since been replaced by another fine of €252,000.
Javier Mascherano Accepted one-year suspended sentence in January 2016 for tax fraud after found guilty of failing to pay €1.5m in taxes for 2011 and 2012. Unlike Messi he avoided trial by admitting to tax evasion.
Angel di Maria Argentina and Paris Saint-Germain star Angel di Maria was fined and given a 16-month prison sentence for tax fraud during his time at Real Madrid. But he is unlikely to go to prison as is normal in Spain for first offences for non-violent crimes carrying sentence of less than two years.
SUSPECTED
Cristiano Ronaldo Real Madrid's star striker, accused of evading €14.7m in taxes, appears in court on Monday. Portuguese star faces four charges of fraud through offshore companies.
Jose Mourinho Manchester United manager accused of evading €3.3m in tax in 2011 and 2012, during time in charge at Real Madrid. But Gestifute, which represents him, says he has already settled matter with Spanish tax authorities.
Samuel Eto'o In November 2016, Spanish prosecutors sought jail sentence of 10 years and fines totalling €18m for Cameroonian, accused of failing to pay €3.9m in taxes during time at Barcelona from 2004 to 2009.
Radamel Falcao Colombian striker Falcao suspected of failing to correctly declare €7.4m of income earned from image rights between 2012 and 2013 while at Atletico Madrid. He has since paid €8.2m to Spanish tax authorities, a sum that includes interest on the original amount.
Jorge Mendes Portuguese super-agent put under official investigation last month by Spanish court investigating alleged tax evasion by Falcao, a client of his. He defended himself, telling closed-door hearing he "never" advised players in tax matters.
8 UAE companies helping families reduce their carbon footprint
Greenheart Organic Farms
This Dubai company was one of the country’s first organic farms, set up in 2012, and it now delivers a wide array of fruits and vegetables grown regionally or in the UAE, as well as other grocery items, to both Dubai and Abu Dhabi doorsteps.
www.greenheartuae.com
Modibodi
Founded in Australia, Modibodi is now in the UAE with waste-free, reusable underwear that eliminates the litter created by a woman’s monthly cycle, which adds up to approximately 136kgs of sanitary waste over a lifetime.
www.modibodi.ae
The Good Karma Co
From brushes made of plant fibres to eco-friendly storage solutions, this company has planet-friendly alternatives to almost everything we need, including tin foil and toothbrushes.
www.instagram.com/thegoodkarmaco
Re:told
One Dubai boutique, Re:told, is taking second-hand garments and selling them on at a fraction of the price, helping to cut back on the hundreds of thousands of tonnes of clothes thrown into landfills each year.
www.shopretold.com
Lush
Lush provides products such as shampoo and conditioner as package-free bars with reusable tins to store.
www.mena.lush.com
Bubble Bro
Offering filtered, still and sparkling water on tap, Bubble Bro is attempting to ensure we don’t produce plastic or glass waste. Founded in 2017 by Adel Abu-Aysha, the company is on track to exceeding its target of saving one million bottles by the end of the year.
www.bubble-bro.com
Coethical
This company offers refillable, eco-friendly home cleaning and hygiene products that are all biodegradable, free of chemicals and certifiably not tested on animals.
www.instagram.com/coethical
Eggs & Soldiers
This bricks-and-mortar shop and e-store, founded by a Dubai mum-of-four, is the place to go for all manner of family products – from reusable cloth diapers to organic skincare and sustainable toys.
www.eggsnsoldiers.com
The Intruder
Director: Deon Taylor
Starring: Dennis Quaid, Michael Ealy, Meagan Good
One star
