EUR BoP: Weak foreign portfolio flows into euro area – Nomura

Analysts at Nomura note that May euro area BoP data showed weaker foreign investment in euro area securities, which is consistent with weak EUR performance amid elevated concerns over Italy’s politics.

Key Quotes

“Foreign investors sold €1.4bn of euro area equities for the second month in a row, while selling LT bonds for the first time in three months (€25.3bn). They were also small net sellers of ST bonds (€7.5bn).”

“Japanese investors turned net sellers of euro area bonds in May, for the first time since September last year, as they likely stayed on the sidelines while volatility of Bunds spiked.”

“US investors were small net buyers of euro area bonds, but they sold UK bonds and US investors’ demands for European bonds remained weak.”

“Euro area investors also repatriated their exposures to foreign equities (€9.0bn). Higher uncertainty on Italy’s politics and spike in volatility slowed both portfolio inflows and outflows in May.”

“Nonetheless, net portfolio flows recorded outflows (€26.5bn) for the second month in a row. Net FDI flows turned positive (€18.8bn), but weaker current account surplus and portfolio flows depressed the basic balance of BoP.”

“Euro area mid-term flows have been improving gradually, but the pace has slowed recently, as concerns over Italian politics increased in May. Italy’s financial market stabilized recently, but ECB’s forward guidance announced in June could weaken net fixed income flows into the euro area in the near future.”

“Foreign investors, such as reserve managers and Japanese investors, still likely underweight euro area assets, and we expect foreign flows into the euro area to recover gradually.”

“Nonetheless, the pace of mid-term flow improvement would be slower after the introduction of new forward guidance by the ECB in the near future, which would lead a delayed timing of EUR appreciation too.”