The European financial market is hampered by geopolitical tensions in the euro area, as growth remains slower than in the US, Valentin Hofstätter said in his presentation of Strategy Global Markets for Q1 2015.
Hofstätter, head of bond market and currency research at Raiffeisen Bank International AG (RBI), said: “The geopolitical tensions in Europe led to a deterioration of sentiment for investment projects. We see this negative effect only moderately improving in the course of the year 2015.”
He added that the estimated GDP growth for 2015 in the euro area is 1.2 percent, two percent less than estimates in the US. Inflation rates are expected to be below 1 percent in both the euro and US areas in the first six months in 2015, and could even turn negative for Euro areas. However Hofstätter predicted that in the second half of the year, the inflation rate in the US could rise to about 3 percent, while the euro area’s increase will be minimal, if it increases at all.
The creation of money from the European Central Bank (ECB) is designed to put more pressure on market interest rates, meaning that institutions can use new funds for new loans to stimulate growth through investments.
Hofstätter, however, does not believe this will be an effective solution. He says: “First, most companies have sufficient cash holding. Second, the growth expectations of the companies are rather gloomy, which is currently more important for their investment decisions than a zero interest rate. Third, many companies’ creditworthiness has suffered since the financial crisis, while at the same time the capital requirements for banks have increased significantly.”
He added that low-interest margins for banks could reduce the value of credit lending, saying: “This is a dangerous development affecting especially those banks which focus in their business model on “normal”, low-risk loans and deposits. This monetary policy will end in a cul-de-sac. Meanwhile, the ECB seems to hope to impact the exchange rates and stimulate euro area exports.”
The Organisation of the Petroleum Exporting Countries (OPEC) have launched a new strategy, tolerating low oil prices in order to keep market shares and therefore benefit when the prices increase. Although this is a risky strategy, Hofstätter suggested that it could prove effective.
Current oil price levels are less that $70 per barrel of Brent crude oil, however Raiffeisen research predicts that oil could reach an average of $80 per barrel in 2015. The dip in price may have come at the right time for the euro area, and could have more impact on the market in 2015 than the ECB’s bond purchasing programme.
