Friday 26 August 2016

BNP Paribas Group Chief Economist William De Vijlder discusses the latest market drivers.


Judging by the evolution of financial markets, the investor mood has been upbeat during the summer months. Last year's turmoil related to the surprise devaluation of the yuan is a distant memory, and European equity indices have recovered rather quickly since the Brexit referendum. As another manifestation of a 'risk on' environment, corporate and emerging markets bonds have declined significantly in recent months. Although it's not the only reason, central banks have again played a key role.

The Bank of England has reacted forcefully to the prospect of a worsening of the real economy and investors still expect more action from the ECB and the Bank of Japan, even though the latter's most recent meeting outcome had disappointed markets.

Most importantly, the more hawkish tone from several Fed officials did not weigh on sentiment, perhaps because investors focus more on the Fed's emphasis on the low neutral rate interest. This is the rate which neither stimulates nor slows down the economy. A low neutral rate, which is the Fed's view, implies that the cumulative tightening in this cycle should be limited and hence should not cause any disruption to speak of in the real economy.

This would imply that the prospect of a Fed tightening later this year becomes less of an issue. The other less benign interpretation is that investors are simply too complacent about the likelihood of a rate hike, despite the strong US employment numbers as of late.

William De Vijlder
Group Chief Economist, BNP Paribas Group
William De Vijlder began his career in the Economic Research Department at Belgium’s Generale Bank in 1987 and became Chief Investment Strategist in the Asset Management division in 1989. He was subsequently Managing Director and Global Chief Investment Officer at Fortis Investments. When Fortis Investments merged with BNP Paribas Investment Partners in 2010, he became member of the executive committee of BNP Paribas Investment Partners and CIO Partners and Alternative Investments, and subsequently CIO Strategy and Partners. In September 2013, he was appointed Vice Chairman of BNP Paribas Investment Partners. Since September 2014 he is Group Chief Economist of BNP Paribas.
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