Global GDP growth has probably only increased marginally in Q2 after the very weak Q1. Economic activity has thus remained disappointingly weak on a global scale.
Last Sunday, the Greek people decided with a clear majority to follow the proposal of their government. With 61.3%, the No camp rejected the conditions of the expired adjustment program. Thereby, Greece is one step closer to an exit from the Eurozone and the European Union.
The breakdown of the negotiations between Greece and its creditors as well as the planned referendum on 5 July troubles capital markets. Greece itself is formally not insolvent. As long that this is not the case the European Central Bank (ECB) will do whatever it takes to contain spillover risks. After the referendum, the next key date will be 20 July, where bonds issued by the ECB will be payable. Until then a number of decisions has to be taken and a new financial package negotiated.
The longest eleventh hour in recent history is drawing to a close. However, while the negotiations earlier this week seem to have narrowed the gap between Greece and its creditors, a final deal has not emerged yet.
Summary: The economic recovery in the developed economies is supported by the very expansive monetary policies, lower austerity pressure on the government front and among banks, and the fallen oil price. Growth rates remain moderate. In the emerging markets we can see signs of low-level stabilisation at best. The possible default of Greece, excessive interest rate hikes in the USA, a further decline of productivity, and continued economic weakening in the emerging markets are the main risks the markets are faced with.
Eurozone government bonds have ensured very good performance returns in the past years. The asset class has benefited from the zero interest rate policy and the very expansive monetary policy of the European Central Bank.
In recent weeks the prices of bonds from Eurozone countries have gone through a correction, above all German government bonds. The reasons for the specific timing of the correction are numerous and cannot easily be pinned down. In spite of slight improvements, we do not expect an interest rate reversal for the Eurozone at this point in time. The fundamentals for such a scenario are not in place.
Euro government bonds are an important component of a portfolio. From both risk and return considerations, a diversification across a broad spectrum of assets makes sense (e.g. by adding high-yield bonds, emerging markets bonds or equities).
The upcoming parliamentary elections on Sunday in Turkey could force Erdogan to postpone his plan for a new constitution and could lead to new political leaders in the Ministry of Finance and the Ministry of Economics. This would trigger an increase in uncertainty and consequently a higher degree of volatility for the Turkish Lira and the Istanbul stock Exchange.
Real global economic growth was weak in Q1. Estimates put economic growth at an annualised 1.5% (q/q). Thus the long-term trend of downward revisions is intact, which keeps the fears of global economy possibly heading for persistent stagnation alive.
The big trends of the past weeks such as the appreciation of the US dollar, the weakening oil price, falling yields, and the outperformance of Eurozone equities have reversed in the past days and weeks, in some cases drastically so.
What is behind all of this?
When both demand (i.e. economic growth) and supply (i.e. production growth) are weak and the central bank policies are very loose, we have a textbook example of an environment causing yields to fall and/or remain low. Indeed, yields were high after the Great Depression in 2008/2009. Having transitioned to a slow, weak, and fragile recovery, yields have started to fall and bond prices have started to rise (i.e. asset price inflation). Even if the economic regime remains unchanged, the market environment may change; the higher the asset price, the lower the expected return or yield.
Real global economic growth was surprisingly weak in Q1. The preliminary estimate for the annualised growth rate of Q4 2014 to Q1 2015 is only 1.5%. This is mainly due to disappointingly weak growth of the GDP in the USA (+0.2%), in China (+5.3%), in the UK (+1.2%), and in Japan (+1.5%; estimate). Brazil (-2.4%) and Russia (-11.5%) have even shrunk (both figures are preliminary estimates). In line with this situation, the data surprises have been largely negative, and the trend of downward revisions for economic growth has continued.