ECB Hike Bets Likely Peaked for Now: 3-Minute MLIV

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00:00Let's talk about these markets with Adam Linton from Bloomberg Markets Live blog,

00:04who joins us on set this Tuesday morning. Adam, very nice to have you with us today.

00:08So let's start with what we're seeing in bond markets here in Europe.

00:10They've been trading for 15 minutes or so, yields a little bit lower this morning,

00:16and sort of maybe unwinding some of the higher yield narrative that we've been dealing with over the last couple of weeks.

00:22Some of it sparked by Isabel Schnabel, and then she was busy speaking again yesterday.

00:26What are we thinking about the European bond market story?

00:28Yeah, I think at the front end, yields could potentially be capped for now.

00:32I mean, a lot of big part of the story, obviously, has been global dynamics as well.

00:35But a lot of it has been some of these remarks we did see early in the month for Schnabel,

00:39potentially talking about the prospect of a rate hike sometime in 2026.

00:44And, you know, we've kind of seen her walk these comments back to some extent,

00:47and she was basically more kind of wanting to make the point that she doesn't think there'll be any more cuts,

00:51but she wasn't necessarily making the case for hikes.

00:54And then also, I think a part of the macro narrative that we've kind of seen over the past week

00:58is some people got quite excited about this Bundesbank report saying we could see markedly stronger growth in 2026.

01:05But if you look at some of the Bloomberg survey data, economists actually a lot more measured in their expectations

01:10than what we could see in the first half of the year.

01:13So things, you know, like domestic demand that could potentially be relatively weak.

01:16And as I've kind of mentioned previously as well, some of the structural issues facing Germany still linger.

01:23And also these fiscal plans, given the government situation there, they could also face a bit of a delay in implementation.

01:29OK. I do wonder if someone's had a word with Isabel Schnabel.

01:31She wants to throw her hat in the ring to be the next ECB president.

01:34I wonder if someone's told her off for being too hawkish.

01:37But that aside, Adam, you've had the yen moves as well that we were discussing earlier in the programme,

01:42the euro strength helping the yen.

01:44Do you think that there's too much optimism prices, the euro at the moment?

01:48Yeah, I think that is fair.

01:49I mean, part of it, obviously, that, you know, I mean, I've been kind of downplaying this rate hike story

01:53that we're looking at for 2026.

01:55I think that part can be parked as well.

01:57But a lot of it is, again, upbeat view of European growth.

02:01And I think 2025 has been a year of eurozone resilience.

02:05But I don't think, you know, the economy is running hot.

02:07I think there's severe problems in Germany.

02:09The France fiscal situation is a source of concern.

02:12And also as well, we're not out of the woods and tariffs.

02:15Yes, we've been more resilient.

02:17But, you know, we need to see how, what the longer medium-term effects of these tariffs are

02:21because they're facing an unfavourable trade situation.

02:23And I don't think the market's really pricing that at the moment.

02:26You're quite constructive on the dollar.

02:28Is that because the U.S. does well or badly because you can make links between either scenario to dollar gains?

02:35Yeah, I think I'd say I'm constructive on the dollar because of, you know, relative growth prospects.

02:39I mean, if you look at a product like Dixie, basically, that is almost a trade on euro dollar with a bit of yen thrown in.

02:45And, you know, I think, OK, we've seen a bit of yen strength creep in in recent sessions.

02:48But I don't think that's going to be sustained.

02:51And then I think, yeah, the U.S. growth outlook, I think, is a lot more upbeat than that of the eurozone.

02:55And I think that's a trade that kind of will potentially focus mines next year.

02:59And if, you know, U.S. growth does hold up quite well, that could potentially temper some expectations for Fed easing in 2026.

03:07And I think that will be reflected in the dollar.

03:09Just finally, given your view on ECB cuts, where would that leave European stocks in 2026?

03:14I think the problem for European stocks is a lot of the upside has been driven by this phenomenal rally that we've seen in financials.

03:22And so I think you're looking for, you know, potentially European stocks to try to extend from somewhere.

03:26And I think that source of strength will potentially wane because it's been on such a long run.

03:31And also the lack of IT sector is also a problem for Europe.

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