HALISTER1: RESEARCH ROUNDUP: BOJ, Fed Stopping Bond Rout Key for Currencies

RESEARCH ROUNDUP: BOJ, Fed Stopping Bond Rout Key for Currencies

(Bloomberg) -- Rising bond yields and steepening JPY, EUR and USD rate curves have weighed on stock markets, and analysts and investors are split on whether the move will continue, casting doubt over the next direction for currencies.
  • The dollar should get a boost if BOJ were to cut rates, Goldman says; BofAML doesn’t believe the bank will be sufficiently credible to push down real rates and is bearish on USD/JPY
  • GOLDMAN SACHS (Silvia Ardagna, Robin Brooks, and Michael Cahill)
  • The correlation between USD/JPY and the shape of the USD and JPY rate curves is now reverting after a divergence following the introduction of negative rates in January
  • All else equal, a BOJ rate cut should be associated with a weaker yen and support Goldman’s view that USD/JPY has room to move higher to 115 by year-end
  • Though not yet a headwind, a risk to this forecast would be a further rise and bear steepening of the JPY curve, given the historical association between higher 10Y JPY and a lower USD/JPY
  • BOFAML (Adarsh Sinha)
  • USD/JPY direction will depend on whether BOJ announcement is viewed as sufficiently credible to push down real rates; suspect it wont be, hence BofAML’s bearish view on the pair
  • Higher U.S. real rates likely to add to downward pressure on Asian currencies; the pace and magnitude of the adjustment will depend on whether the sell-off in G3 rates morphs into a more sustained “tantrum” associated with lower breakevens
  • NOTE: BOJ making QQE more flexible may lead to steeper yield curve, stronger yen, BOFAML says
  • CREDIT AGRICOLE (Valentin Marinov)
  • USD/JPY likely to remain caught between re-emerging policy divergence and escalating risk aversion
  • USD to regain yield support; should continue as Fed expectations adjust toward resumption of a tightening cycle
  • BOJ to announce policies to re-steepen JGB curve and even cut depo rates further; may not allay fears the central bank is quickly running out of easing options
  • With BOJ fast running out of policy ammunition, investor sentiment and FOMC may weaken JPY
  • UBS (Daniel Waldman and Themos Fiotakis)
  • Skeptical dollar can go higher; don’t expect back-end rates in the U.S. to continue rising amid low inflation, low trend growth and accommodative monetary policy globally
  • Euro-area yields have looked significantly low for awhile; move could extend as yields converge toward fair value
  • Depending on the BOJ meeting, a steeper curve and higher real rates in Japan are possible; such a move limited to a further 30bp rise
  • More sustainable rise in German yields should provide some support for EUR over time and limit USD’s ability to resume a broad uptrend; JPY likely to remain under appreciation pressure until more dovish BOJ signals
  • UNICREDIT (Vasileios Gkionakis)
  • Some normalization in coming weeks remains the central scenario and a re-run of April 2015 moves is unlikely
  • Hence expect a broad-based USD decline and JPY gains; AUD, NZD and RUB to recover recent losses, NOK and CAD to appreciate and EUR/USD to trading close to current range with some upside bias; stay strongly bearish GBP
  • Risk-correlated currencies AUD, NZD would weaken if equity and bond sell-off extends; AUD/USD likely to approach 0.72 and NZD/USD may drop toward 0.68 -- levels at which would consider re-entering longs
  • EM currency selling would likely extend, with ZAR potentially the main casualty
  • Would eventually spur sharper JPY gains as any additional BOJ stimulus will disappoint yen bears; fiscal expansion should also be considered a net positive for JPY
  • BNP PARIBAS (Daniel Katzive)
  • BNP rates analysts see scope for EUR and USD curves to continue steepening near term even as negative net supply in October will limit EGB yield upside
  • U.S. curve probably has more scope to steepen, particularly if inflation expectations begin to pick up
  • Analysts neutral Japan curve now as it has probably re- steepened enough to suit the BOJ’s objectives
  • A modestly steeper U.S. curve would likely coincide with a firmer USD, EUR and JPY against higher-beta currencies; remain positioned for this via AUD/USD put spreads
  • SOCIETE GENERALE (Kit Juckes)
  • A proper bear market needs a pretty radical change in the G-3 inflation and growth backdrop, rather than weariness of markets
  • If the bond correction is a stop-start affair, FX markets will still be choppy
  • SocGen is short NZD/USD and GBP/USD, long EUR/GBP; watching the possibility of a break higher in USD/CAD and remains long AUD/NZD
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
UCG IM (UniCredit SpA)

People
Adarsh Sinha (Merrill Lynch Asia Pacific Ltd)
Daniel Katzive (Bnp Paribas)
Daniel Waldman (UBS Asset Management Japan Ltd)
Kit Juckes (Societe Generale SA)
Michael Cahill (Goldman Sachs Group Inc/The)

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UUID: 7947283

HALISTER1: EUR CDS Basis Seeking Zero-Bound Highlights Yield Hunt: Analysis

EUR CDS Basis Seeking Zero-Bound Highlights Yield Hunt: Analysis

(Bloomberg) -- Euro-denominated high-yield cash bonds are now approaching the most expensive levels relative to credit-default swaps in 20 months, spurring concerns about the risk of a mean reversion, Bloomberg strategist Simon Ballard writes.
  • NOTE: Prices as of Friday, ~4pm BST
  • Basis currently shows a Z score of 1.76 above mean, moving toward a score of 2, a deviation some investors interpret as a signal that it could revert to the average
  • As investors have pushed secondary bond spreads tighter in their hunt for yield, iTraxx Main/EUR HY cash basis has risen to -15 from an all-time low of -214bps on Jan. 21
    • Risk appetite has been buoyed by both the ECB and the BOE putting in place implicit backstop bids for corporate bonds via asset-purchase programs
    • In addition, spread tightening and curve flattening were likely accentuated during July, August by reduced mkt activity; those trends are now easing with investors back in the market
  • Now near the highest level since Jan. 2015, the CDS-bond basis may look less attractive versus earlier this year; that, combined with any fears of a surprise Fed rate rise later this month, may damp further extension of risk appetite
  • But ECB CSPP and BOE bond-buying programs will likely underpin risk tolerance levels, help to avoid capitulation
    • Indeed, the technical widening of EUR HY spreads and a steeper quality curve over past week should still encourage some investors to eye credit mkt investment opportunities
  • NOTE: A negative basis exists where a cash bond/index spread is wider than the corresponding CDS spread. In a negative basis, the cash bond is the cheap asset and the credit default swap is the expensive asset
  • 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.
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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UUID: 7947283

HALISTER1: ROUNDUP: Funds Await BOJ Move Amid Bond Rout Before Adding Risk

ROUNDUP: Funds Await BOJ Move Amid Bond Rout Before Adding Risk

(Bloomberg) -- While the recent increase in global bond yields is creating opportunities for investors, markets may see further selling on technical factors, fund managers say.
  • Aberdeen and Henderson wait for more clarity from the BOJ next week before making their next move
  • Janus and Old Mutual expect to see further volatility and see no reason to buy in current weakness
  • Yields from Japan to Germany to the U.S. have climbed in the past week amid signs that central banks may gradually remove policy accommodation
  • ABERDEEN AM
    • Portfolio manager Patrick O’Donnell says he remains overweight on European duration and is looking to add risk
    • Expects global rates to rally; will continue to keep flattener trades on until there is a higher probability of real fiscal action globally
    • Uncertainty around BOJ’s apparent re-appraisal of its monetary policy is deterring investors from buying into market selloff: MORE
  • HENDERSON
    • Fund is looking to buy into current market volatility as central banks provide a supportive backdrop, but remains short for now awaiting further news on BOJ’s next steps, according to Mitul Patel, head of interest rates
    • The firm is short bunds via put options and holds curve steepeners; it shifted positions ahead of last week’s volatility
    • BOJ decision on Sept. 21 is a concern given there does seem to have been a shift away from a flattening stance: MORE
  • JANUS CAPITAL GROUP
    • Portfolio manager Ryan Myerberg says in interview he prefers to be cautious on risk as “when everything starts to sell off together, bond, stocks, credit, EM, it is a warning sign”,
    • Cautious on bonds duration in the near term and expects the curves to continue to steepen; in the longer term, doesn’t see any natural pressure for the rates to go significantly higher given the lack of growth and still- low CPI
    • Also cautious on investment-grade credit in Europe where the valuations are tight; sees better opportunities in U.S.
    • Says the next couple of months are crucial for investors as there is a lot of uncertainty on what the central banks will do, and asset prices have become reliant on accommodative monetary policy
    • The recent selloff has been partially triggered by investors questioning the ability of the central banks to continue to deliver; the very stretched positioning into the market also played a role and some repricing was probably needed
    • Doesn’t see any switch toward fiscal policy as positive for bonds
  • OLD MUTUAL
    • Firm has been short duration with steepeners in core government bonds, and owns CDS to hedge against credit exposures, portfolio manager Nicholas Wall says in interview
    • While we see many reasons to own bonds in the medium term, more “washouts” are possible and bond markets can overshoot in both directions
    • If the market perceives that the pace of monetary easing is slowing, the large number of carry trades in all asset classes may unwind; any selloff could be accentuated given the large amount of assets that reside in strategies such as risk-parity; says these strategies provide great insurance when bonds and stocks are negatively correlated, but can accentuate market moves in both directions when correlations go positive
  • JPMORGAN AM
    • Favors corporate debt over stocks and government bonds, global market strategist Vincent Juvyns says in a phone interview
    • Time to be selectively overweight on emerging-market asset classes, especially in emerging-market debt corporates and local rates
    • Recent market selloff has been triggered by a lack of action at the ECB’s latest meeting
    • “Nothing big is happening”; market sentiment remains pretty much dependent on the central bank decisions: MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Mitul Patel (Henderson Group PLC)
Nicholas Wall (Old Mutual PLC)
Patrick O'Donnell (Aberdeen Asset Management PLC)
Ryan Myerberg (Janus Capital Group Inc)
Vincent Juvyns (JPMorgan Chase & Co)

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UUID: 7947283

HALISTER: J&J to Buy Abbott Medical Optics for $4.325b in Cash

J&J to Buy Abbott Medical Optics for $4.325b in Cash

(Bloomberg) -- Abbott to sell Abbott Medical Optics, its vision care business, to Johnson & Johnson for $4.325b in cash.
  • JNJ sees deal immediately adding to adj. EPS
  • ABT spikes to session high; up as much as 1.1%
  • Statement:Link
Alert: HALISTER
Source: BFW (Bloomberg First Word)

Tickers
JNJ US (Johnson & Johnson)
ABT US (Abbott Laboratories)

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UUID: 7947283