Although the European Central Bank (ECB) is expected to deliver a further monetary stimulus to kick-start growth – possibly as soon as this week – JPMorgan Chase is already looking ahead to the end of quantitative easing (QE) and warns investors to prepare for a correction in bond yields.
According to reports, the ECB’s policy of purchasing government bonds – part of the QE programme that it embarked upon in March 2015 – had surpassed the €1 trillion level as at the end of last week.
In a note issued by the bank, John Normand, JPMorgan’s London-based head of foreign-exchange, commodities and international rates research states that “the circumstantial evidence is building” that ECB easing is reaching its limits and this could push debt yields up from record lows.
Last week, Normand wrote that since mid-August “we’ve been positioning selective in trades that benefit from a gradual rethink” in policy. He recommends that investors cut overweight positions in the bonds of Europe’s peripheral nations, predicting that spreads with benchmark debt could widen by as much as a percentage point.
He also advocates buying so-called curve steepeners, which would profit if longer-dated bond yields climbed by more than those on shorter-term debt.
A separate note by JP Morgan’s banks research team claims that European banks, whose valuations have persistently lagged their US peers, are unlikely to close the gap as American banks were quicker to restructure after the 2008 financial crisis and now further benefit from the country’s stronger economic performance.
As a result, European banks bear more of a resemblance to the low-returning banks of Japan, which have struggled ever since the country’s economic boom abruptly ended at the end of the Eighties.
The research note goes on to suggest that European banks are even “behind the curve” relative to Japanese rivals as they “haven’t done any of the cost-cutting which Japanese banks have done” or conducted a much-needed “balance sheet clean-up”.
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