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Thursday, 18th April 2024
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ECB expected to cut rates again Back  
This month we introduce The Finance Economic Panel, consisting of leading Irish market participants and analysts, who each month will provide views on key financial markets, covering currencies, equities and the gilt markets.
This month’s contributors are: James Jordan, Senior FX Trader, Ulster Bank, Alan McQuaid, Chief Economist, Bloxham Stockbrokers, Jim Power, Director of Investment Strategy, Friends First Asset Management, Phelim Keogan, Chief Dealer NIB, Eugene Kiernan, Head of Asset Allocation, Irish Life, Enda Coll, Head of Institutional Treasury, Anglo Irish Bank

Euro 1 month interbank rate
McQuaid said that despite some negative comments from top ECB officials recently, suggesting that the current level of official interest rates in Euroland is appropriate, he still believes that the bank will be forced to cut rates further in the coming months as it becomes clearer that the Eurozone economy needs more stimulus to get it going. As such, he expects that the one-month inter-bank rate will reflect this, and expects it to be around 3.15per cent at the end of March, 3.25per cent at the end of June and around 3.60 per cent by year-end. Jordan agrees with this and expects interest rates to drop to a base of 3 per cent before they turn.

5 year euro swap rate
Kiernan forecasts slightly higher swap rates to the end of the year and expects them to rise to 5 per cent over the next 3-6 months. McQuaid can see the rate falling back in the near-term, but also expects it to gradually move towards 5 per cent and beyond over the course of the year.

Kiernan says that there is scope for sterling to weaken against the Euro in the near term and it will very much be driven by the politics of Euro entry and recent polls have been less negative on joining.Jordan believes that there is a distinct downside risk emerging

Power says the euro looks set to struggle as prospects for a US recovery outweigh any possible European recovery. Coll expects that the strong market belief in the US recovery story, together with continued capital flows into USD denominated assets is likely to limit the upside for the Euro in the coming months. Indeed he says that there is a strong possibility that the Euro will hit a new all time low against the Dollar before it eventually recovers.

According to Power, US equity markets are likely to remain nervous as the markets continue to question current valuations in light of the prospective recovery in economic growth and earnings. Current valuations are based on a relatively strong recovery in earnings in 2002, which may be too demanding. Furthermore, balance sheet issues in the aftermath of the Enron problems are likely to keep investors in a nervous frame of mind. Coll also thinks that there is a distinct possibility that the economic/earnings figures released in the months ahead will not match expectations .As a result, we may see continued profit taking in the Dow Jones industrial average down to 9,500.

10 year euro bond yield
McQuaid forsees Eurozone government bonds out-performing treasuries (in local currency terms) in the coming months on the back of tighter monetary and fiscal policy settings. However he recommends staying below duration for long-term bonds. He sees the 10-year Euroland government bond yield at around 5.00per cent by mid-year and 5.25per cent by year-end. Jordan is looking for a return to the January 2001 high of 5.75 next and then higher still. He thinks that regaining the psychological level of 5.00 is proving tough but any pullback is not expected to move under 4.50 again.

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