Report from BNY Mellon Investment Manager Raises Concerns about Divisions within ECB
NEW YORK and LONDON, April 18, 2012 — The European markets are likely to continue to be a significant source of volatility as divisions within the European Central Bank (ECB) inhibit its ability to put the region on a firmer footing, according to Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon.
Standish made the observations in its April Outlook, written by Thomas D. Higgins, global macro strategist at the firm. The conflicting viewpoints of members of the ECB's governing council appear to limit the bank's actions, according to the report. Standish said that it does not believe the ECB will move to reduce volatility and improve liquidity until the sovereign spreads in Spain and Italy approach previous highs.
"Our expectation is that Europe will continue to be a source of global financial market volatility in the coming months," said Higgins.
Higgins continued by commenting that the large disparities in economic growth and inflation expectations between euro zone economies may complicate the European Central Bank's (ECB) ability to act. Monetary policy is too loose for Germany and too tight for almost every other country in Europe, according to the report.
"The ECB's long-term refinancing operation (LTRO) has certainly helped to reduce systemic risk in the banking system," said Higgins. "However, the LTRO's honeymoon with investors may be ending as they realize that the flood of liquidity does nothing to address Europe's underlying solvency problems."
David Leduc, Standish's chief investment officer said, "The volatility is likely to lead to continued range-bound trading for rates near term."
The Standish paper recognizes that European leaders need to take a number of steps to safeguard the future of the euro. These may include:
Lifting restrictions on the free flow of capital and labor across borders,
- Harmonizing tax entitlement programs,
- Developing a true pan-European budget that allows for transfer payments from stronger to weaker regions in the currency area, and
- Creating a true euro zone bond issuance program.
Such measures could take years to implement, but investors likely would take comfort that Europe would be working toward a common goal, according to Standish. These actions are advisable so that the debt-laden peripheral European nations can escape from a pattern of recessions, which drive down government revenues. The lower revenues typically result in more austerity, followed by further economic weakness, the report said.
Standish Mellon Asset Management Company LLC, with approximately $92 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), core / core plus and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in insurance and liability driven investing. The firm also includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon.
BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.9 trillion in outstanding debt and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com or follow us on Twitter@BNYMellon.
All information source BNY Mellon Asset Management at March 31, 2012. This press release is qualified for issuance in the UK and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised. This press release is issued by BNY Mellon Asset Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Past performance is not a guide to future performance. Registered office of BNY Mellon Asset Management International Limited: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorised and regulated by the Financial Services Authority. A BNY Mellon Company(SM)