- The Eurozone should benefit from sustained worldwide activity and a supportive policy mix, leading to a 1.6%y/y growth trajectory.
- Headline inflation should begin to ease towards 1.5% going into 2Q2017 while core inflation should remain contained at 0.5-1.0%.
- We expect the ECB to adopt a more neutral monetary policy stance over the balance of the year with a shift in communications over the summer months and QE tapering by year-end.
- Despite the market-friendly outcome in the first round of the French elections, markets appear to underprice the potential of fragmented parliaments and stagnant reform efforts in key EU economies.
- Investor outflows from the continent have stopped in recent months, though inflows may return following the market-friendly result of the 1st round of French elections.
- The expected pivot in policy by the ECB could cast a cloud over EUR bond markets introducing the prospect of a return of interest rate volatility to the continent.
- We see non-directional bond strategies, risk premia strategies and market neutral hedge fund strategies as credible alternatives to EUR bond exposure.
- We prefer European equities to US equities as economic recovery should continue to widen the gap between Eurozone earnings expectations and US expectations which have been falling through much of the year.
- Eurozone banks should be a beneficiary of economic recovery especially with a pivot in ECB policy expected.