Currently viewing the tag: "Yield curve"
View: Sit with trends buying stocks into weakness, bearish UST’s and short EUR/USD
Election-day and markets are typically sedate, more out of habit than anything else. We find it difficult to become overly excited at the outcome whoever wins seeing rather limited room for policy manoeuvre going forward. While much has been written about the positive prospects for the US economy should Romney receive a mandate we’re not convinced it would herald any marked shift in trajectory, certainly a sustainable one. We have no concerns Romney would be a Tea Party-ite, more the moderate he has spent most of his career and the more radical campaign promises should be whittled back accordingly, including many of his tax reform ideas which look incomplete to put it modestly. But he would face similar obstacles to Obama in dealing with the fiscal cliff, particularly if the Democrats remain in control of the Senate and the debt ceiling might even be more of a contentious issue with a Republican at the helm as expectations shift accordingly. There has been much chatter about the impact Romney would have on the dollar, which seems to centre on the hostility towards Bernanke and his QE programmes. While this might mean Bernanke takes the easy way out by standing down when his term expires in January 2014 we doubt it will have any immediate impact on easing with any President likely to be seduced by the prospect of the easy stimulus/scapegoat package.
Full report below…
View: View any further UST curve steepening opportunistically, like flatteners vs. 5yr
Resurgent equity markets continue to take centre stage with a raft of analysts’ papers regurgitating the likely benefits of more quantitative easing, cobbling this move together with evidence of economic green shoots (which higher equity markets supposedly tell us are there). That other favourite topic, what all this means for bond yields, is also back in the spotlight, centring on the fact that this uptrend in stocks will invariably trigger rotation out of safe haven bond markets into riskier assets, as evident during both previous instances of QE. But with the Fed committed to holding rates low until mid-2015 at the earliest now, with an additional bias for directing policy to flatten the curve via the twist, it’s difficult to see this juncture as a significant inflection point for core yields. Indeed, higher yields are one thing that would kill a recovery in a still debt heavy economy where dynamics are still ultimately deflationary. Rather it should exert shorter-term corrective pressures within the broader trading range, particularly at the longer-end of the curve, before yields edge lower once again.
Full report below…
View: Bears should have much better levels to play from, 1.63% the key level for Bunds
Quite how far this risk on move can go is hard to say, much of the detail of the Draghi plan was leaked ahead of time but still there was a rush of new money into risk assets once the OMT was formally unveiled and this morning’s German constitutional court decision was equally unsurprising in its outcome, even the oversight the Court requested with regard to the level of German contributions to the ESM.
Full report below…
View: Economic weakness more of a risk for GBP than Gilts, like duration
The timing of Nigel Lawson’s observation that George Osborne should relinquish his role as chief Conservative chief party strategist to focus on the more important role of Chancellor has proved to be rather well timed with this morning’s first look at Q2 GDP showing the UK economy shrank at a dire -0.7% q/q rate, well below the median forecast of -0.3% q/q, leaving y/y growth at -0.8%. Ouch. The market was quick to seize on the positives, citing the Jubilee effect which most seem to think knocked 0.5% of the quarterly growth reading not to mention the rain which lasted a lot longer than that extended weekend. But this doesn’t alter the fact that the reading missed the median guess (who knew about the bank holiday and might have also looked out of the window at some point in Q2) by a significant margin and leaves us with three consecutive quarters of contraction in this double dip.
Full report below…
View: Negative Schatz yields to become the norm, equity correction a selling opportunity
There seem to be two scenarios currently; the first being that European ‘can kicking’ will continue, and despite things looking like they might totally implode at any moment, they will somehow manage not to for the visible future. Quite what this can kicking achieves of course is beyond us, it’s a bit like that drunk who knows that tomorrow is going to be a write off, so might as well plough on with those Jaeger bombs regardless. If we had to nail down the date of tomorrow in this context we’d say between the start of September and end of October 2013, the probable dates of the next German election and Octoberfest. The alternate is that can kicking is actually no such thing, it merely reflects policy paralysis and that the core/periphery divide is unbridgeable. The steps that appear after EU summits are vague and tied to such extended timelines directly due to this. The hard line taken by both Finland and the Dutch is telling, neither seem willing to compromise on the austerity driven solution despite the fact that we’re way past the point where this is really a valid crisis response. Signs of German compromise seem to have hardened their stance if anything. The ECB meanwhile refuses to act, believing that it is the responsibility of politicians, oblivious to the fact that consensus politics can’t achieve much with such disparate agendas. Some might say there is a third scenario where a workable strategy that allows the Eurozone to rebalance and grow slowly emerges, we’d just say good luck with that.
Full report below…
View: BoE demand to keep back of the curve steep, close 30yr-10yr flattener
It wasn’t a great surprise to see the BoE dust of its tool bag this morning, delivering a further £50bn increase in its asset purchase programme while leaving base rates on hold at 0.50%, as we and pretty much the rest of the market expected. There had been some calls for more (£75bn), as a signal of intent really, but the bank doesn’t look particularly constricted by delivering ‘just’ another fifty which will be deployed over the next four months, bringing the printing cycle back into line with the quarterly inflation reports. We were disappointed as to how this cash will be disbursed, evenly across the existing maturity buckets when we’d been hoping for some additional duration. It will be interesting to see how this impacts liquidity, currently the BoE won’t buy bonds once its holdings hit 70% of outstanding stock, the GBP375bn QE programme in comparison is equivalent to around 37.5% of UK debt stock.
Full report below…
View: Sell AUD/USD, looking for pair to reconnect with bearish commodity prices
Sluggish growth is becoming an increasingly global phenomenon; contagion from the Eurozone crisis takes the largest chunk of the blame though efforts to cool Chinese overheating are also playing a part, particularly on the commodity side slowing demand growth across the complex. We identified both Copper and the AUD as potential ways to pay the Chinese slowdown risk specifically back at the end of March (http://bit.ly/LDya3l), both ideas have proved their worth although the recent bounce in AUD has erased a good chunk of gains that short positions recommended back then had enjoyed.
Full report below…
View: Banking/Fiscal union something for a smaller Eurozone, we dislike French debt
Global markets response to the Spanish bank bailout is interesting, it appears that investors have become a little more confident they can compartmentalise the situation while at the same time seeing the package as insufficient, which is most clearly visible in the diverging paths of equity markets and Spanish bonds. The poor performance of this market is clearly understandable given the structure of the package will be detrimental to existing SPGB holders, effectively creating a €100bn tier of debt that sits above them on the creditors list (assuming it is channelled through the ESM), something we know from Greece is never good. Furthermore the actual sums involved look unlikely to be sufficient, even the Spanish government acknowledges that there are still significant downside risks in the property market. New guestimates from JP Morgan have suggested the sector might need €350bn in total, ouch. It doesn’t look particularly good for some of the other creditors, Italy for example will have to fund its contribution in the markets at 6% while lending to Spain at 3%.
Full report below…
View: Payrolls print is not an inflection point, open short 10-yr UST @ 2.05%
While most were absent Friday enjoying the Easter break those less fortunate were subject to a rather disappointing payrolls print with the headline missing the 200k consensus forecast by some 80k jobs and revisions were broadly flat (January -9k, February +15k). Hours worked also dropped back to 41.7 from 41.9 and earnings flat-lined, a further drag. The unemployment rate did drop to 8.2% from 8.3% but the participation rate was also a little weaker and therefore this improvement was not enough to offset the negative reaction the headline release brought.
Full report attached…
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- ANALYSIS:US Mar Payrolls +120k, 8.2% Unemplymt-Only Fair News (forexlive.com)
