Halister News

(Bloomberg) -- Portfolio manager Patrick O’Donnell says he remains overweight on European duration and is looking to add risk as the recent market volatility is akin to past episodes when investors questioned policy accommodation.

• Expects global rates to rally; will continue to keep flattener trades on until there is a higher probability of real fiscal action globally
• Uncertainty around BOJ’s apparent re-appraisal of its monetary policy is deterring investors from buying into market selloff
  • One way Japan’s central bank seems to want to steepen the yield curve is by cutting rates further into negative territory
• Once the BOJ’s policy assessment is known, people will want to look for a positive nominal yield; that will support the JGB curve, which in time should be supportive for other markets
• For now, JGB yields have become relatively attractive again; therefore, domestic investors’ capital flow from Japan has slowed; should resume; those investors have been buying Europe duration and expect that to proceed
• In the euro zone, it looks like the ECB is having its own comprehensive assessment, which heightens the probability of the next PSPP evolution being a shift in the capital key; expects to see periphery start to attract attention as we get closer to the central bank’s December meeting
• While the political situation is fluid, we have learned that the ECB tends to trump these events and expect that to be the case again, at least for the time being
• Don’t see risk of any aggressive fiscal policy in the region until the next recession as this isn’t a policy lever than can be pulled easily in Europe; Japanese fiscal efforts have under-delivered
• Logistically, such measures are more likely in the US under a Trump presidency than with Clinton so may see risk assets weaken and support for rates if Trump were to move significantly ahead in the polls