EBI and economic expectations take separate ways
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25 August 2014
Posted in
sentix Euro Break-up Index News
In August, the sentix Euro Break-up Index (EBI) rises for the first time since December. But its increase by 0.6 points to 8.2% remains negligible. This holds all the more true if one considers how pronounced the recent fall of sentix economic expectations has been. Euro-zone government bonds thus remain an interesting asset class for investors. The sentix EBI data point to particularly good opportunities in Spanish titles.
Above all, the forceful policy of the European Central Bank should be the reason for the enormous investor confidence in a continued irreversibility of the euro. Otherwise one can hardly explain the sentix EBI's stability as important crises linger on. This stability is all the more worth of note as the Ukrainian conflict has just recently left deep traces in investors' economic expectations: At the beginning of the month the corresponding sentix index for the euro zone had fallen sharply (see graph). But, obviously, investors currently do not fear an economic downturn could bring back the euro zone's debt dilemma to the fore. This is underpinned by the latest sentix poll on positioning in euro-area government bonds which shows that market players have largely gone long over the past weeks. Euro-zone bonds thus stay in investors' favour.
entix EBI's national details indicate that the slight increase of the aggregate EBI can be chiefly explained by higher exit expectations for Italy (1.9% after 1.1%) and Germany (1.1% after 0.4%). In addition, the EBI for Portugal rises once more against the background of the events surrounding Espírito Santo group. Meanwhile, Spain is the winner of the month! Not only does its EBI recede to an all-time low of 0.4%, but, on top, there is now no single institutional investor left expecting the country to leave the euro within a years' time. Consequently, the Spanish EBI of this investor group currently stands at zero for the first time since the survey's launch. The EBI data thus signal that Spanish government bonds still are very attractive – especially Spanish 10-year titles against Italian ones.
Furthermore, the French EBI is worth a mention: Despite the economic woes the country faces these days, its EBI stays at an almost negligible level of 0.8%. Finally, the Greek EBI remains unchanged at 5.7%. Given the Ukrainian crisis and the (economic) proximity to Russia, one could have imagined much worse readings.
All in all, the solid confidence in the euro's future integrity continues to be a supportive factor for euro-zone bonds. But the confidence seems to come almost exclusively from the ECB's monetary policy. Consequently, Mario Draghi and his colleagues are now under increased pressure as the euro project currently faces significant headwinds from the economic cycle.
