EMEA Weekly Outlook

Just as it looked as though the global economy was on the way out of the great recession and investor confidence was returning, things turned negative. Yet again, it has been a shock from the euro zone -- this time the ill-executed bailout of Cyprus -- that has unnerved international investors. While it is early days and the implications for global markets are hard to evaluate, it is nonetheless clear that investors have received a reminder that this crisis is not over yet and the situation in the euro zone in particular remains the biggest risk to the global recovery and global financial stability. It is hard to be impressed with EU policymakers’ handling of the euro crisis, so investors are likely to have lost some confidence as a result of the Cyprus debacle. So, it is clear that we can no longer assume that it is just ‘risk on’ forever and investors are well aware of this.

Cyprus is not the only country in Europe that is in trouble. Hungary has also been attracting headlines recently -- especially due to its controversial new constitution and the appointment of former economics minister Matolcsy as the new central bank governor. The forint has weakened significantly in recent weeks as a consequence of these worries. However, while we remain deeply sceptical about the conduct of economic policy in Hungary and about the Hungarian government’s interventionist and populist stance, we nonetheless think that the forint is now trading at quite cheap levels against the euro. Hence, we expect stabilisation of the forint going forward because it seems as though the Hungarian government and the central bank are finally realising a need for a somewhat more low-key approach to communicating with the markets.

As a consequence of the latest round of euro troubles, our outlook for EMEA markets has also been dented and this has led us to be more caution on the near-term outlook for the EMEA FX and fixed income markets.

This said, we strongly believe the Federal Reserve is committed to the Bernanke-Evans rule, hence bringing down substantially U.S. unemployment, and that the new governor of the Bank of Japan, Kuroda, is committed to implementing the bank’s new 2% inflation target. Therefore, we expect both the Fed and the BoJ to step up monetary easing if the Cyprus troubles jeopardise their targets. In our view, this is positive for global risk appetite in the medium term and we therefore continue to look for EMEA assets to continue to perform fairly throughout the year – despite the near-term worries from the eurozone.

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