As central banks begin to remove excessive accommodation, markets are going to be affected.
The same way central banks “have influenced financial markets in pushing asset prices up, as they start the removal of […] excess accommodation, it’ll have a reversal effect,” says Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
Also, de la Durantaye expects that “government bond yields won’t continue to plumb new lows from here.” If anything, he says, yields “will likely move back up as accommodation is gradually removed. We see very low, single-digit returns – if not slightly negative returns – for government bonds.”
It’s a tough balancing act for central banks, he adds. Pulling back too quickly could trigger a recession while taking it too slow could exacerbate “inflationary pressures that are building faster than expected.”
But the news isn’t all bad. “There will be some bright spots in various regions,” forecasts de la Durantaye.
Europe a rising star
For Europe, economic growth is positive (real GDP is projected at 1.9% for 2017) while inflation remains relatively low, indicating that the pace for removal of accommodation will probably be slow, says de la Durantaye.
Mario Draghi, president of the European Central Bank, confirmed as much in a June speech. At that time, he said policy parameters must be adjusted gradually to ensure stimulus accompanies economic recovery.
“That doesn’t sound like a central bank that is tightening, but rather [a Bank that] will gradually remove accommodation as [it] get[s] confirmation on growth,” says de la Durantaye.
Another positive for Europe is its dissipating political risk. “Election results have been much more positive than originally expected,” says de la Durantaye, referring to expectations for populism.
For example, “with the election of Emmanuel Macron in France and the likely re-election of Angela Merkel in Germany [in September], you’ll see France and Germany coming together and potentially implementing market-friendly policies that are potentially going to be seen as positives.”
That all adds up to an optimistic outlook for both Europe and the euro, says de la Durantaye. “From an economic and a political aspect, Europe is looking brighter and brighter.”