Many economists have the opinion that Europe will have another year of very low growth and it is no secret that I share that position. The same growing number of economists, as well as financial market participants, also express skepticism about the European Central Bank’s (ECB) monetary policy.
I regard it is possible that the central bank would prefer to change its monetary policy position, but it will be a difficult task for the ECB to signal a change in the monetary policy given the weak economic growth running in the background.
By a “monetary policy change”, I do not mean a rate hike in 2020, but a message that the next step will be a rate hike, which could be in 2021.
If the ECB should go for a change, and search for a successful timing, then some global economic tailwind is needed and the increased European fiscal stimulus must work, or the announcement of even more public investments could also trigger a change.
I consider it as very likely that both the internal and external skepticism about ECB’s monetary policy have reached a level where it’s difficult for the central bank just to maintain the same rhetoric throughout 2020. My best bet is that at the press conference on 16th July, the ECB is changing its rhetoric as it prepares the market for a change in the monetary policy, however this could also happen in June.
On the other side of the Atlantic, it would surprise me if US President Trump could push the American central bank towards more interest rate cuts, which means that a definitive change in global monetary policy is taking place (excluding Japan) in 2020.
Consequently, my position is that this year, the bond market is starting to face tough times.
It is important to note that I expect the falling bond prices to simply express a shift in the yield curve, such that adjusting to the fact that central bank rates are set to rise at some point, which all bond prices will adjust to.
The coming move in the bond market will be a correction, and not a new bear trend, which for example, would require rising inflation, though that particular risk is not relevant this year.
Also important to notice is that I am still not worried about any significant widening in the credit spread this year, though the concern about poorer credit quality will become a major theme later this decade, maybe in 4 to 5 years.
2020 will also be a year when politics will once again affect the financial markets. It’s not necessarily the US presidential election, as this event is pretty much on the financial market’s radar screen.
But perhaps, not everyone has noticed the new troubles that are emerging for the Italian government, like when the Italian Minister of Education Lorenzo Fioramonti announced his departure during the Christmas days. This can happen, but it is a hard blow for an Italian government operating on a very weak foundation, and with the EU skeptic Matteo Salvini just waiting to get back into power.
In that Italian game, the regional elections in Emilia-Romagna at the end of January may play a central role, and risks to intensify the debate about Italy’s future within the EU. In case it will happen in a political context in the Eurozone, with a German government that remains incapable to govern, and a French president whose biggest project now is to raise the future retirement age for the railway staff and other employment groups.
All in all, I argue that Europe starts out as the biggest challenge in the financial markets, seen with a perspective for the whole year 2020. Though during the first half-year, I see a good chance of economic optimism due to increased public spending— of course my wish for 2020 is that the optimism will continue throughout the whole year in Europe, but it looks more like a wish than a reality.
