Robeco: Economic rsiks in Europe

Main market events
Peripheral spreads widened mildly this week amid weakening confidence surveys from exceptionally high levels, slightly deteriorating industrial production and disappointing retail sales. Italian bonds have returned 2.41% year-to-date, Spanish bonds 3.01%, Portuguese bonds 2.34% and Irish bonds 0.3%.

ECB
Some ECB Governing Council members acknowledged some tightening in financial conditions in the Eurozone as a result of the US announcement of tariff imposition on steel and aluminum. Some of them also called for caution, pointing the risks surrounding the normalization of the monetary policy, especially the risk of restrictive policy move that could endanger the expected rebound in inflation. This week the ECB published a paper on the European Deposit Insurance Scheme, emphasizing all the benefits to be expected in terms of risk-reduction in the banking system and increase in the banks’ loss-absorbing capacity. This is a positive development in the run-up of the banking union, which should benefit mostly the periphery in the coming months.

Italy
After two rounds of formal consultations to form a government majority, the Italian political landscape is still in an impasse. Italian President Mattarella may need to give the mandate to a non-prominent party leader to break the deadlock. He stressed the urgency of the situation given escalating geopolitical tensions and strains over international trade. Under such a scenario, the mandate is likely to be temporary, lasting up to the time where a compromise is found between the parties. As long as the Italian economy is growing and government finances are improving consequently, the lack of a government need not be bad for bond markets.

Spain
Moody’s will publish today on Spain (Baa2 Positive Outlook). A one-notch rating upgrade is expected by the market, which should bring the sovereign rating to Baa1 with positive outlook. This is all the more likely as Moody’s current rating is two notches below S&P and Fitch. Inflation pressures have started building up in Spain, with flash headline inflation rising to 1.2% in March. 

Robeco Euro Government Bonds 
We have modestly increased positioning in euro peripheral bonds, participating to issuance of new Irish and Portugal 15-year bonds this week. Spreads widened in the run-up to the issuance of these bonds (and recovered afterwards), so the issuance offered a nice opportunity to add some exposure at somewhat higher spreads. The fund is now overweight 5-10 year Italian bonds, 10-year Portuguese bonds and 10-year and longer-dated Spanish bonds. Currently the fund is 49% invested in peripheral bonds, well above index level. Year-to-date the fund’s absolute return is 1.40%*.



* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 12 April, 2018. The value of your investments may fluctuate. Past results are no guarantee of future performance.