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Despite Germany’s Inflation Spike, ECB Should Hold Fast

Franck Dixmier | 03/03/2017
What If the ECB Runs Out of Bonds to Buy?

Summary

We don’t expect the ECB to announce any major changes at its next meeting, since euro-zone core inflation remains quite low and the market could react strongly to any hint of an end to QE – which would be counterproductive to the central bank’s goals.

At its next Monetary Policy Committee meeting, we expect the European Central Bank to maintain its accommodative stance. However, the surprise increase in inflation observed in Germany during February (+2.2% year-over-year) is bound to spark debate about the relevance of the central bank maintaining its asset-purchase programme at its current pace.

Nevertheless, given that core inflation in the euro zone remains almost unchanged at its currently very low level, we expect the ECB to reiterate that it will take some time for the inflation rate to reach its target. Germany’s recent inflation spike, which is considered transitory and has not been observed throughout the entire euro zone, is therefore unlikely to weigh on the ECB’s monetary-policy decisions.

The question of tapering is also unlikely to be raised during the Committee meeting. An announcement about the discontinuation of the quantitative-easing programme would be premature at the present time and not without danger, as the market’s likely brutal reaction to the anticipated end of QE would be counterproductive to the ECB’s goals. Against this backdrop, we are not expecting any such announcement before the autumn of this year.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

120175

Expert-Image

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer Fixed Income Europe. Franck is a member of the Global Executive Committee as well as the European Executive Committee at Allianz Global Investors. Franck joined Allianz Group in 1995.

A Fed Hike Is on the Cards

Franck Dixmier | 10/03/2017
Data-focused Fed still dovish, but Brexit looms

Summary

We fully expect the FOMC to announce a hike in the fed funds rate at its next meeting, following strong US jobs numbers, rising inflation and a supportive macroeconomic backdrop. Not doing so would confound market expectations and risk a surge in volatility.

We fully anticipate that the US Federal Reserve will announce a rate hike this month. If this is the case, the Fed will have skilfully succeeded in guiding market expectations toward its normalization scenario without any major hitches, albeit at the cost of a marginal increase in long-term rates. On the other hand, postponing the expected hike would send out a confused message to the markets and undoubtedly trigger a fresh surge in volatility.

The Federal Open Market Committee has actively prepared the markets for a hike in the fed funds rate. While the markets initially expressed a degree of scepticism toward the Fed’s dot-plot chart (which reflects how the central bank expects it will shift interest rates), they now seem convinced and are pricing in an imminent hike, with implied probability of close to 100 per cent.

Underlying trends in the jobs market and inflation rate have provided the Fed with a solid case for justifying future rate hikes. This has been reinforced by a favourable macroeconomic and financial backdrop: The global growth outlook has been revised upward slightly, while an increase in risk appetite has maintained market volatility at a low level.

In addition to the expected increase in the fed funds rate, the Fed’s policy committee meeting should also provide the central bank with a platform to outline its latest macroeconomic forecasts and set the pace for further rate hikes. We expect the Fed will reiterate its resolution to continue normalizing monetary policy. However, it is too early to announce a reduction in the size of its balance sheet, which has now reached USD 4.5 trillion. The Fed probably plans to wait for the normalization process to advance further before doing so.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

122744

Expert-Image

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe
Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer Fixed Income Europe. Franck is a member of the Global Executive Committee as well as the European Executive Committee at Allianz Global Investors. Franck joined Allianz Group in 1995.
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