Robeco: Peripheral Europe Update, week 30

Sanchez loses vote of confidence  

Main market events

Peripheral spreads moved more or less sideways during the week, as markets awaited the ECB meeting on Thursday. The risk of a government collapse in Italy declined after Prime Minister Conte gave his support to a high-speed Alpine rail link to France, which was one of  the election promises of deputy PM Salvini. Initially markets rallied on Thursday after the ECB’s introductory statement, but this move fully reversed during the afternoon, as Draghi met, but not managed to exceed the elevated market expectations. Italian bonds have returned 9.1% year-to-date, Spanish bonds 9.2%, Portuguese bonds 9.0% and Irish bonds 6.6%.

ECB

Draghi unambiguously paved the way for fresh monetary easing at the September meeting. Forward guidance was changed to now explicitly make reference to the expectation for policy rates at “lower levels” through 1H 2020 – a clear hint at a cut in the deposit facility rate. This will likely be accompanied by measures to mitigate the side-effects of negative interest rates (for banks), possibly in the form of a “tiered system”. The ECB has also tasked committees to examine options for the “size and composition of potential new net asset purchases”. Finally, Draghi stressed that if the inflation outlook continues to fall short of its aim, the ECB is “determined to act”, in line with its commitment to “symmetry” in the inflation aim. This could allow the ECB to let inflation hover above 2% for a while after the current undershooting, and hence to keep policy accommodative even longer.

Spain

Spain's caretaker Socialist prime minister Pedro Sanchez lost a parliamentary vote of confidence after talks with far-left Podemos to form a coalition government failed. Apart from the 123 lawmakers of his Socialist party, just one other deputy from a regional grouping voted for Sanchez, leaving him far short of the simple majority he needed. Sanchez now has another two months to find ways of getting support, either for a minority or coalition government. Without a deal Spain would have to go back to the polls in November.   

Robeco Euro Government Bonds 

We slightly added to Portuguese bonds on Wednesday in anticipation of a dovish statement by the ECB. We believe peripheral bonds will remain supported during the summer, as Italian political risk decreased this week, and markets will focus on the package that will be announced by Draghi at the September 12th ECB meeting. The fund is 42% invested in peripheral bonds, which is 1% above the level of the index. Year to date the absolute return of the fund is 7.42%*. 

_{* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, 25 July, 2019. The value of your investments may fluctuate. Past results are no guarantee of future performance.}