Views and Ideas

Even though it was widely expected, QE extension announcement pushed peripheral bond yields much lower

31 October 2017

The week was definitely not favorable for the fund as emerging markets currencies are suffering a lot and the ECB delivered a dovish message.

Regarding emerging market currencies, a few reasons explain the pressures currently faced. In general, US government bond yields are rising because of strong economic data but also because of the next Fed chairman nomination that is still uncertain, leading to a strong USD. On top of that, some of our positions are impacted by specific issues (NAFTA agreement for the Mexican Peso, diplomatic tensions around the Turkish Lira). Where do we stand? 

  • 10-year US government bond yields are at 2.47%, which is almost the highest for the year. At this level there is little room for further yield increase, especially with European and Canadian central banks delivering dovish messages last week 

  • Does it make sense for emerging market currencies to go down in this kind of environment? Absolutely – and specific risks are real. But the magnitude of the adjustment is already quite significant especially for countries with strong macroeconomic data 

Speaking of carry positions, we still believe that those assets are today quite appealing compared to other assets. It may take some time, but we do think that the “carry trade” will come back at some point in the markets, and those assets should be well positioned.

The ECB held its committee last week: 9-month extension (until sept 2018) and reduction to €30bn from €60bn. It is broadly in line with the market’s expectations in general but the reaction has been rather cautious with a global decrease of government bond yields (especially Italy and Spain) and a decrease of the euro from $1.18 to $1.16. The latter had a very positive impact on euro equities, up by more than 2%. 

According to an article published last week by Politico, Yellen and Warsh seem to be out of the race for the Fed chairman nomination with now only Powell and Taylor remaining. 2018 budget has also been adopted in the US, that was a must before potential tax reform. 

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The information and material provided do not, by any means, represent advice, offers, solicitations or recommendations for investing in specific investments. All statements reflect the opinions of their authors at their publication date and do not constitute a contractual commitment on behalf of the management company. These assessments are subject to change without notice, within the prospectus’ limitations, which is the only legally binding document. La Française Group declines liability in any form for any direct or indirect damage resulting from the use of this publication or the information that it contains. This publication may not be reproduced in full or in part, disseminated or distributed to any third party without the prior written consent of La Française Group.  
 
La Française Allocation is a French UCITS in regards to the 2009/65/CE Directive. The Fund received AMF authorization on July 15th 2003 and was launched on July 31st 2003. The strategy changed as of July 19th 2012. Management company : La Française Asset Management – Paris – approved by the “Autorité des Marchés Financiers” under N GP97076 on July 1st, 1997.

For more information regarding the French regulatory authority - Autorité des Marchés Financiers (AMF) – please visit www.amf-france.org.www.amf-france.org.

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  • La Française Allocation Share Class R
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  • La Française Allocation Share Class S

 

The information and material provided do not, by any means, represent advice, offers, solicitations or recommendations for investing in specific investments. All statements reflect the opinions of their authors at their publication date and do not constitute a contractual commitment on behalf of the management company. These assessments are subject to change without notice, within the prospectus’ limitations, which is the only legally binding document. La Française Group declines liability in any form for any direct or indirect damage resulting from the use of this publication or the information that it contains. This publication may not be reproduced in full or in part, disseminated or distributed to any third party without the prior written consent of La Française Group.  
 
La Française Allocation is a French UCITS in regards to the 2009/65/CE Directive. The Fund received AMF authorization on July 15th 2003 and was launched on July 31st 2003. The strategy changed as of July 19th 2012. Management company : La Française Asset Management – Paris – approved by the “Autorité des Marchés Financiers” under N GP97076 on July 1st, 1997.

For more information regarding the French regulatory authority - Autorité des Marchés Financiers (AMF) – please visit www.amf-france.org.www.amf-france.org.

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