HALISTER1: European Domestic Credit Sectors to Outperform in 2017: BofAML

European Domestic Credit Sectors to Outperform in 2017: BofAML

(Bloomberg) -- Europe’s domestically focused credits stand to outperform those that are more export-oriented in 2017, BofAML credit strategists including Barnaby Martin write in client note.
  • Main domestically focused sectors are seen as retail, telecoms, utilities, insurance and banks
  • Expect to see a more powerful reach for yield, with corporate hybrids and European high-yield likely to benefit as total returns in high-beta credit start to stand out
  • The “unsteady” state that exists in credit at the moment is that bank spreads trade wider than corporate spreads
    • Wide bank spreads pressure the outlook for banks’ lending volumes, especially if negative yielding debt is a funding alternative for big corporates
    • Bank senior spreads currently much wider than corporate spreads in Germany and Italy (and to a lesser extent France); suggest a tightening of bank senior spreads “would be most welcome”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Barnaby Martin (Merrill Lynch International)

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HALISTER1: EUROPE RISK TIMELINE: Politics at Front and Center for Now

EUROPE RISK TIMELINE: Politics at Front and Center for Now

(Bloomberg) -- Political events remain center stage with elections in the U.S., the Autumn Statement in the U.K. and the approaching referendum in Italy at the forefront of investors’ minds.
  • MAIN RISK EVENTS:
  • Attention in early November centers on the U.S. presidential election; any shift toward fiscal easing and/or more protectionism could change the Fed’s course
  • In the U.K., the prospect of a hard Brexit seems to be solidifying; better-than-expected data and higher-than- forecast borrowing have damped expectations of significant giveaways in U.K. Chancellor Philip Hammond’s Autumn Statement
  • Italy’s referendum on constitutional reform continues to garner attention as polls increasingly suggest Renzi’s plans won’t be backed by voters
  • Central banks across the region have signaled they’re in wait-and-see mode for now
  • Question marks remain over whether OPEC will succeed in holding up oil prices after October talks in Vienna led to agreement on little more than to keep talking
  • Any Merkel decision to stand for re-election will also be key; the likelihood she will stand again is seen to have increased, with concerns over the health of German banks ebbing and refugee flows lessening
  • Talks over Greek debt relief and IMF participation continue
NOVEMBER
  • Senior judges in London may make a ruling this month on whether a U.K. parliamentary vote is needed before PM May invokes Article 50 of the Lisbon treaty; the case will likely be swiftly appealed to the Supreme Court for another hearing
  • DBRS expects to review Italy in coming months, according to September statement, and says a “yes” vote in referendum would be good news
  • 2: Fed rate decision; shouldn’t elicit much market reaction if Fed is successful in signaling high likelihood of a Dec. rate hike, BofAML analysts writes
  • 3: U.K. Oct. services, composite PMIs
  • 3: BOE rate decision, minutes, Inflation Report; MPC had said more easing possible if needed; HSBC and Goldman are among banks that think robust data since the Brexit vote means it’s too soon for more stimulus
  • 3: ECB publishes economic bulletin
  • 7: U.K. MPs to hold Brexit debate
  • 7: Eurogroup to discuss banking union, Greece, Cyprus & Spain
  • 8: U.S. presidential election
  • 11: S&P may review Italy’s rating
  • 15: U.K. Oct. CPI
  • 16: U.K. Oct. claimant count; Sept. average weekly earnings
  • 20: French presidential candidate right and center primaries; Juppe leading Sarkozy in the polls
  • 23: U.K. Chancellor’s Autumn Statement; expected to include some fiscal measures to counteract risk of recession
  • 23: Euro-area preliminary Nov. services, composite PMIs
  • 23: Fed minutes from November meeting
  • 25-26: OPEC and non-OPEC officials hold more talks in Vienna
  • 27: Second round of French right and center primaries
  • 29: German Nov. CPI
  • 30: BOE Financial Stability Report
DECEMBER
  • French president Hollande says he will say whether he’ll run again this month; would-be left-wing candidates have between Dec. 1 and Dec. 15 to apply, according to newspaper reports
  • Second Greek review may be completed by year end
  • 4: Italian referendum; with polls showing backing for reforms is waning, JPMorgan’s Marco Protopapa says risks of extreme political instability are likely overstated
    • Electoral law, not the constitutional referendum, is the real political risk event for market, Mediobanca analysts say
  • 4: Austria repeats presidential election
  • 5: U.K. Nov. services, composite PMI
  • 5: Euro-area final Nov. services, composite PMI
  • 5: Eurogroup meets in Brussels
  • 5-7: Germany’s CDU party holds national convention; Merkel may announce whether she intends to stand again next year
    • Berenberg’s Holger Schmieding says with the refugee issue less in the limelight, support for her CDU/CSU could easily rebound to a level that would mean no government could be formed against her
  • 8: ECB rate decision; Nowotny says will take a decision on extending QE; Draghi says any discussion will benefit from new projections extending to 2019
  • 9: Fitch may review U.K., France, EFSF, ESM ratings
  • 13: U.K. Nov. CPI
  • 14: Fed rate decision; markets price ~70% odds of a rate rise, giving the Fed room to move, Credit Suisse says
  • 15: BOE rate decision
  • 15: TLTRO II take-up; banks took EU45b in September
  • 15: Provisional deadline for French left-wing presidential candidate applications
  • 15: Euro-area preliminary Dec. services, composite PMIs
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Holger Schmieding (Joh Berenberg Gossler & Co KG)
Marco Protopapa (JP Morgan Securities LLC)
Philip Hammond (United Kingdom of Great Britain and Northern Ireland)

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HALISTER1: INSIDE ASIA: Aussie Jumps on RBA; China PMI Surpasses Estimates

INSIDE ASIA: Aussie Jumps on RBA; China PMI Surpasses Estimates

(Bloomberg) -- Aussie surges after RBA held rates, while most Asian currencies strengthen after China’s factory gauge jumps to a two-year high.
  • Aussie advances as much as 0.8% as RBA kept its cash rate at 1.5%. Central bank also flags brisk gains in some housing markets and its reading of a steadier outlook for top trading partner China
  • China’s October PMI came in at 51.2, beating the 50.3 estimate. Other indicators including non-manufacturing PMI and Caixin manufacturing were also better
  • The PMI data helped Asian currencies though overall sentiment still isn’t great, says Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie. Market uncertainty is being elevated ahead of upcoming key U.S. data and event risks
  • Yen weakens after BOJ says it will maintain its monthly bond purchases for super-long-term debt, dampening some expectations that it will start to taper
    • USD/JPY rises as much as 0.3% to 105.10 after the November debt-purchase plan was announced. It was earlier unchanged when BOJ said it won’t add stimulus at its policy decision
    • BOJ shifts reaching CPI target of 2% toward second half of period running through March 2019, trims inflation forecasts for FY2016 to FY2018, and says “risks to economic activity and prices are skewed to the downside.”
  • Sovereign bonds slide in Australia, Korea and Malaysia, while gaining in China
  • Aussie gains for third day, with leveraged accounts reloading long AUD/USD positions, according to an Asia-based FX trader
    • Central bank will leave policy on hold for the foreseeable future, according to economists
    • RBA’s updated language on China, “brisk” rises in house prices, and macro outlook is another step in a series of incrementally less dovish communication: Goldman
    • AUD/JPY could retreat to 78.074 level near term as pair fails to breach 200-DMA resistance: Analysis
  • Onshore yuan heads for first 2-day gain vs dollar in 6 weeks while offshore yuan falls
  • PMI shows economic recovery is well supported, which will give PBOC room to curb a property bubble and tighten liquidity in the “money markets,” says Macquarie Securities head of China economics Larry Hu
    • Still, export orders had dropped, and PBOC may keep a weak yuan bias to counter soft global demand, says Natixis
    • Strong PMI reading supportive of Asian regional trading partner currencies, particularly AUD, KRW and TWD, says RBS
  • Won strengthens as much as 0.5% vs dollar
    • BOK board called for caution on household debt, according to minutes of Oct. 13 rate decision released today
    • Household debt is a key reason why BOK is freezing interest rates, Stephen Lee, economist at Samsung Securities says; focus will turn to govt’s announcement on Thursday of another round of measures related to household debt
    • Prosecutors detain Choi Soon-sil, a friend of President Park at the heart of an influence-peddling scandal; the scandal while a blow for Park, isn’t for the economy: Capital Economics
    • CPI +1.3% y/y in October, highest since February, vs est. +1.1%. Exports met estimates, while imports -5.4% vs -4.4% est.
  • Ringgit swings to a gain after China data
    • Malaysia likely to report weaker trade number this week, which will maintain pressure on MYR, CIMB writes in note; trade data due Nov. 4
  • Rupiah advances for a second day
    • Indonesia CPI +3.31% y/y in October, highest in 4 months
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Larry Hu (MacQuarie Securities Ltd)
Nizam Idris (Macquarie Group Ltd)
Stephen Lee (Samsung Securities Co Ltd)

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HALISTER1: EGB Flows Show Demand for Core Bonds Staying Strong: Citi

EGB Flows Show Demand for Core Bonds Staying Strong: Citi

(Bloomberg) -- Last week saw the largest net buying of core EGBs over the past four weeks, led by Germany and Belgium with significant net demand in 10y and 30y sectors, Citigroup strategist Saumesh Dutta writes in client note.
  • 30y non-core bonds saw net selling and demand for this sector was the lowest in six months
  • Net selling seen in euro linkers of all issuers except Germany last week
    • Demand for Bundei now at the highest level in a year
    • Demand for Italy and Spain has declined sharply over recent weeks
  • Last week, gilts saw the largest net selling in two months led by the 30y sector once again
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Saumesh Dutta (Citigroup Inc)

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HALISTER1: AUCTION PREVIEW: 5y Gilt Rich in RV, Mixed Views on Auction

AUCTION PREVIEW: 5y Gilt Rich in RV, Mixed Views on Auction

(Bloomberg) -- U.K. to Sell 0.5% 07/2022 for GBP2.75b at 11:30am CET.
  • Analysts see no sign of RV concession, sharp rise in outright yields may tempt some investors; BOE QE backstop supportive
  • Citi (Saumesh Dutta)
    • 5yr gilt yields now back to pre-referendum levels, auction will be seen as a test of demand just before the Inflation Report
    • See no sign of auction concession on the curve, as seen in yield flies vs neighboring issues
      • Issue has cheapened ~7bps on the 2s5s10s fly over past two weeks, though this fly has been strongly correlated to the spot 5y, prefer to remain cautious given the recent sell-off
    • See value in 3s5s swap spread box as both 01/2021-07/2019 and 07/2022-07/2019 swap spread boxes have cheapened over past 2 months, now look historically attractive
      • Like buying 07/2022s vs swaps boxed to 07/2019s using this auction
  • RBC (Vatsala Datta)
    • Outright yields have more than doubled since last auction, now close to 0.76%; 5y sector has also cheapened vs shorter-dated maturities, with 2s5s yield curve ~20bps steeper over the period
    • 5y gilts have also cheapened 20-25bps on cross-market basis vs bunds, USTs since last auction driven by various factors including relative rise in inflation expectations in the UK
    • With markets now pricing no probability of a rate cut next year in the U.K., see risk/reward favoring better performance in gilts heading into Inflation Report; auction offers good opportunity in this regard, given the cheapening on various metrics
  • JPMorgan (Francis Diamond)
    • Prior three short conventional gilt auctions have all been relatively well received, with bid-to-cover ratios of 2.3x, yield tail of 0.4bps on average
    • Issue does not stand out as particularly attractive from a relative value perspective, though expect to see decent auction demand given the ongoing QE program
    • At a macro level, 5Y sector looks rich on the curve, although the outright level of yields may attract buying interest
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Saumesh Dutta (Citigroup Inc)
Francis Diamond (JPMorgan Chase Bank NA)
Vatsala Datta (RBC Europe Ltd)

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