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Is the European equity party over or is there more to go for?

by Helen Harjak on May 21, 2014 at 13:23

Inflation also remains stubbornly beneath 1%, considered the ‘danger zone’ and well below the ECB’s target of 2%. Views are mixed on the scale of the threat this poses.

Capital Economics’ Roger Bootle last week warned that ‘Europe is turning Japanese’, sliding into a deflationary spiral that will result in sovereign defaults. But his long-standing prediction has yet to play out and Kumar is more sanguine.

‘While we do not feel this is likely to become entrenched as a serious economic threat, it would increase pressure on the ECB to take some kind of action,’ he said. ‘So far, the ECB has maintained its profile and its reputation through the threat of action, rather than [acting].’

As for the Ukraine crisis, although any flare-ups will cause spikes in volatility, Pimco’s Francesc Balcells, hopes Russian self-interest will ultimately curb any ambitions it has in Eastern Europe.

‘Russian corporates are among the most active in international debt markets, and Russia has tried hard, and successfully, to open up its local currency debt markets,’ he said. ‘A confrontation in the West would erode many of these achievements, driving more foreign investors away. However, when it comes to geopolitical ambitions, rational thinking can take a back seat, which leaves the range of potential outcomes in Ukraine wide open.’

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