More European investors now see the withdrawal of central bank stimulus as a bigger risk to European credit markets than eurozone sovereign debt problems, but most believe central banks will tighten policy without threatening the economic recovery, according to Fitch Ratings' latest quarterly investor survey.
The risk posed by the winding down of quantitative easing was deemed high by 68% of survey respondents, up from just 19% in our April survey, and an all-time-high since we introduced this question in mid-2011. Sovereign debt problems were identified as a high risk by 65% of respondents, while 71% said a prolonged recession poses a high risk to European credit markets, down from 86% in our previous survey.
However, nearly three-quarters - 73% - thought that central banks will reduce stimulus in a timely and smooth manner following the initial shock to financial markets caused by Fed Chairman Ben Bernanke's comments on the Fed's exit strategy in late May. Only 9% feel that rates will rise too quickly, causing bond yields to jump, whereas 18% view monetary policy action as too slow, increasing the risk of asset bubbles.
Our survey period ran from July 1-July 31, during which time the ECB said it would keep rates at their current or lower levels "for an extended period of time," while the Bank of England said that market expectations that rates would rise were "not warranted." This appears to have strengthened investor confidence in central banks' ability to manage policy without derailing a fragile economic recovery as the proportion of survey respondents indicating confidence in the process rose sharply from 44% in early July to the final 73%.
Given central bank sensitivities to potential market disruption, Fitch thinks they will attempt to unwind the stimulus gradually. But we still expect the effort to generate periodic bouts of market volatility. Ultra-loose monetary policy has the potential to create asset bubbles, and we believe there is already evidence of this in select markets, such as highly levered corporate loans and US private student loans.