Halister News

--MATTHEW BOYLE

(Bloomberg) -- Initial attempts by the market to take risk assets tighter this morning faded as concerns surrounding Deutsche Bank intensify with knock-on effects seen as Lufthansa and now NordLB pull deals, Bloomberg strategist Simon Ballard writes.

• Start of BOE’s Corporate Bond Purchase Scheme should provide some fillip for the asset class, even if the program has been well flagged since August and largely priced in to spreads

STATE OF PLAY (Tuesday 11.30am BST)

• Synthetic indexes edged tighter at open, but subsequently reversed gains to push wider on fragile market sentiment; iTraxx Europe currently 74.76 mid (+2.1ps) just off earlier session high of 75.20; Xover 337.91 mid (+5.2bps, 339.20)
• Financial protection trading wider to reflect concerns surrounding Deutsche Bank; iTraxx senior and sub indexes quoted +3.8bps and +8.1bps respectively
  • Deutsche Bank 1yr CDS is sharply wider (+19bps) at 198.52 at time of writing (from 146 on Friday)
• Secondary EUR cash indexes straddling unchanged on average; EUR IG index quoted this morning at 60.83bps -1.4bps, but EUR HY under pressure and +2.7bps at 350.07bps OAS
• GBP secondary cash outperforming slightly on back of BOE CBPS; GBP IG -0.5bps at 142.17 and GBP HY +1.0bps at 463.05bps
• Bloomberg Commodity Index seeing moderate weakness ($84.70, -0.2%) as oil prices lead sector lower on speculation of OPEC output deal; WTI -1.2% at $45.39, copper Dec 2016 futures -0.6% at $218.50; Silver Dec 2016 futures quoted -0.4% and gold at $1344.60 (-0.3%)
• EUR equity indexes trading negatively across all major bourses (-0.6% on average), with DAX the laggard (-0.9%) at time of writing
  • U.S. equity futures holding onto positive territory though, as Clinton’s perceived ’win’ in last night’s presidential debate is seen market supportive; U.S. corp bond mkt likely to be driven by Deutsche Bank sentiment at open later
• Cautious tone across risk assets also feeding modest haven bid for EUR govt bonds this morning; Obl/bund yields 2bp lower on average across the curve at time of writing
  • 5Y bund -0.59% (-2p), 10Y -0.14% (-2bps), 30Y 0.43% (-2bps)

NOTE: Simon Ballard is a credit strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

(Bloomberg) -- Italian bonds, stocks and the euro may face downside pressure in the event of a “no” vote at the nation’s constitutional referendum to be held Dec. 4.

• While such an outcome is unlikely to trigger early elections, it could weigh on the already weak Italian growth and delay banking reforms, strategists and economists say
• Goldman Sachs sees ~60% chances of a “yes” vote; others banks including UBS, UniCredit say the result is too close to call
• Fitch, Moody’s also see risks from the referendum

• Goldman Sachs
  • Assigns a slightly higher chance (60%) to the reforms passing than the polls presently suggest, analysts including Francesco Garzarelli write in client note
  • Mentions a number of factors which should play in favor of a “yes” vote, including an expansionary 2017 budget that should be outlined in October
  • Bond spreads would “stay in check” even if constitutional reforms are rejected as the ECB is expected to continue its QE beyond March 2017
  • Still, until opinion polls turn to suggest that the “yes” camp is gaining ground, Italian sovereign risk should continue to be priced above Spain’s
  • Take a more negative stance on Italian banks; if the “no” vote prevails, sees a weakened center-left government muddling through until early 2018, possibly without Renzi at the helm
  • Chances of successful market-driven recapitalizations of the weaker Italian retail banks, which are already likely to be pushed into 2017, would diminish substantially
    • Assigns 60% chance to Renzi’s resignation conditional on a defeat at the referendum

• UBS
  • Based on recent opinion polls, the outcome is too close to call, team including Felix Huefner, Nishay Patel say in client note
  • If the referendum is voted down, political uncertainty increases and reform progress takes a step back
  • For Italian banks, risks are positively skewed as the upside in a “normalization” scenario supported by a “yes” vote outweighs the limited downside in a more negative scenario potentially triggered by a “no” vote
  • Favors banks with excess capital and discounted valuation, such as buy-rated Creval and BPER; also has a buy rating on Intesa
  • In event of a “yes” vote, expects 10-year Italy- Germany bond spread to initially tighten by 5-10bps while a “no” vote is likely to result in a widening to over 155bps
  • The political backdrop in Spain is currently more favorable than in Italy, and the bank maintains a preference of being long 10Y Spain versus Italy; also recommends hedging against a potential escalation of Italian risks by selling 10Y Italy vs U.S. Treasuries, targeting 0 bps

• HSBC
  • Renzi has played down resignation talk recently but the damage might have already been done as he would be under significant pressure in event of a “no” vote, economists including Fabio Balboni write in client note
  • A “yes” vote could take Italy’s 10Y yield flat with Spain initially, but Italy’s underperformance should continue in the medium term because of low growth and concerns over the banks
  • A “no” vote could see the 10-year spread gap widen to over 40bps but the knee-jerk reaction should be limited by ECB and dip-buying
  • Vote has the potential to create volatility in equities, but not on the scale of the U.K.’s EU membership referendum; a “no” vote combined with PM Renzi standing down may lead to a significant risk-off event for Italy, with repercussions for wider Europe
  • Says EUR should be relatively indifferent to any outcome, although risks may be biased slightly to the downside in the near term, given that little political risk premium is priced in

• Nomura
  • Market reaction is likely to be asymmetric and much bigger in the case of a “no” vote with Italian bonds and EUR likely to sell off on the result, economists including Anna Titareva and Charles St-Arnaud write in client note
  • Still, the rejection of constitutional reforms is unlikely to trigger an election; this means that the current government is likely to continue until the expected election in 2018 and that any market overreaction is likely to be partly removed in the weeks following the referendum
  • A positive outcome to the referendum would reduce political uncertainty, which could lead to a compression of spreads between Italian and Spanish bonds through a small rally in Italian rates

• UniCredit
  • The referendum outcome remains too close to call, economist Loredana Federico says in client note
  • Notes that the “no” camp hasn’t gained further significant ground in recent weeks as the Five Star Movement has been facing a slight decline in popularity due to the resignation of several key members of Rome’s municipal government and the mounting problems of Rome’s new mayor
    • Renzi changing his communication strategy and shifting the focus from himself could also play in favor of a “yes” vote
  • Still, the political situation remains very fluid, and the risk that the vote might become a plebiscite on government remains high
  • In event of a “no” vote, sees the installation of a caretaker government, led by a person of high standing, as the most probable outcome; an early-election scenario, in spring 2017, remains the least likely one
  • Any transitional government, or a weakened Renzi government wouldn’t be positive for the country in the near term as reforms are likely to progress slowly; economic activity is also likely to remain weak and a confidence shock will negatively affect firms’ and households’ behavior

• Barclays
  • In event of a “yes” vote, doesn’t expect an implementation of additional meaningful structural reforms, as the government would probably want to avoid costly political decisions before the next round of general elections that should be held no later than May 2018, economist Fabio Fois says in client note
  • With a “no” vote, expect PM Renzi to resign; snap elections are unlikely to be called immediately after, as they would most likely lead to a hung Parliament
  • Would expect President of the Republic Mattarella to sound out political leaders’ willingness to form a temporary govt led by a PM, who could still be Renzi, charged with improving the voting system in order to minimize the risk that no political party is able to secure an outright majority in both chambers

(Bloomberg) -- Investors to step up bets on koruna gains in coming months before Czech central bank removes currency cap, ING economists Jakub Seidler and Petr Krpata write in report.

• Rate on 2-year sovereign notes to drop below minus 1% “sooner or later once inflows intensify” from minus 0.59% now
• ING estimates Czech National Bank sold CZK70b-CZK80b in September FX interventions as demand for koruna spiked
• ING reiterates its call for CNB to end FX cap in 1H 2017
• At policy meeting on Thursday, CNB “might try to keep a dovish stance to calm the market” with “verbal intervention”
• NOTE: Czech Koruna Cap End Won’t Spur Steep Gains, Central Banker Says Link

--SARA FORDEN

(Bloomberg) -- DSTA sold EU1b of the 01/2037 bond, changing its auction price 3 times; the average price of 172.80 (0.298%) suggests average overbidding at around 30c, Kim Liu, senior rates strategist at ABN Amro, writes in client note.

• Overbidding was higher than average in recent long-end Dutch auctions
• Pattern in auction prices shows DSTA managed to sell bond at very steep levels to exploit potential demand in the market
  • High auction prices also meant that the market had difficulties to digest the auction, probably resulted in a choppy bidding procedure
• NOTE: Netherlands Sells EUR1 Bln 4% 2037 Bonds; Yld 0.298%

(Bloomberg) -- August retail sales y/y came in stronger than July but still missed expectations, and the downward trend for retail sales is expected to continue, Swedbank economist Cathrine Danin writes in research note.

• Weakening trend in retail sales seen over the summer
• Swedish labor market to remain strong though disposable income will grow at a slower pace due to tax increases