HALISTER1: EU RATES ROUNDUP: Bearish EUR Rates Duration Bias into ECB

EU RATES ROUNDUP: Bearish EUR Rates Duration Bias into ECB

(Bloomberg) -- Most analysts continue to hold a short bias in EUR rates duration with those who aren’t still recommending hedges such as steepeners, buying downside protection for ECB meeting.
  • RBS (strategists including Oriane Parmentier)
    • Remain bullish 10Y bunds, targeting -0.40%; pressure remains on fiscal tightening instead of easing, given PSPP buying, balanced budgets, negative supply of duration to the market
    • Believe the market remains underweight bunds, reinforces bullish bund view; uncertainty around U.K., slowing growth, lackluster inflation also supportive
    • Long bund positions may also benefit from relaxation of QE rules at this week’s meeting; continue to expect ECB to cut rates further, starting with 10bps in Dec. meeting
  • Deutsche Bank (strategists including Francis Yared)
    • Given relatively resilient data, the ECB may stay on hold this week; any further policy accommodation a close call; should limit itself to an extension of QE (which is priced, announcement likely to have minimal impact), technical changes to the program
      • Market is pricing 1bp rate cut at this month’s ECB meeting, 12bps of cuts on a cumulative basis by 1Q 2018; shape of the Eonia curve, excess flatness of 5s10s and 10s30s curves indicates the market is pricing an eventual extension of ECB QE
    • Volatility, payer skew are at levels very similar to that seen in April 2015 before the sell-off; given limited positioning, benign inflation outlook, weakening global growth, any sell-off should be muted compared to Apr-Jun 2015; recommend 1x1.5 3M 10Y ATMF/ATMF + 25bps payer spreads
    • In the U.K., maintain short gilts 5Y5Y as the amount of QE priced-in remains excessive; also hold short EUR 5Y as it is unlikely that the ECB delivers the 13bps of cumulative rate cuts currently being priced in
  • JPMorgan (strategists including Fabio Bassi)
    • Expect ECB to disappoint modestly with no rate cut, no QE extension, no scarcity measures; risk-reward still favors shorts in 10Y bunds, move to 10s30s steepening bias; keep reds/greens steepener outright, initiate level-adjusted greens/blues EONIA steepens
      • Hedges against ECB disappointment include 2s/10s weighted bear steepener, paying belly of 5s10s20s EUR swap fly
    • Hold short gamma bias at front-end of the curve; tactically, take profit on short 3Mx2Y gamma and instead sell Dec. 16 schatz gamma; stay short Oct. 16 unhedged Bobl strangles (131.75/131.50, Dec16 Bobl futures at 131.61), which was primarily initiated as a carry trade
    • Further out the curve, stay long 10Y gamma; lack of action by the ECB and BOJ later this month has potential to push yields higher, especially if markets start to interpret a lack of action as a reluctance to provide further stimulus
    • In U.K., stay long Nov16 MPC OIS; remove bullish bias on gilts, turn neutral on duration given improving data, fading negative net supply impact, rich valuations; take profit on both 2s10s and 10s/30s gilt curve flatteners; enter 30Y swap spread narrower given upcoming gilt supply, potential increase in swapped issuance, short term valuations
  • Citi (strategists including Harvinder Sian)
    • Data, financial conditions don’t warrant a bazooka response from ECB, but low inflation points to an extension of QE by 6-months
    • PSPP parameters may be altered, baseline is lift in 33% limit on non-CAC bonds, which infers a sharp flattening rally but buys just a handful of extra months
    • Adjustments to capital key or depo floor removal may mean an end of PSPP driven negative convexity effect, infer curve steepeners with bearish long end momentum
      • EUR spread options attractive to set-up for curve steepening: MORE
    • Growing more concerned about effects of negative rates on bank profitability, ultimately the transmission mechanism; hold short EUR 1y1y OIS, selling 2y1y receivers, long 2y 2s5s floors
    • Cautious on PGB spreads, not significantly bearish given the ECB; domestic politics, headline risk can weigh on tone over near-term, keeping spreads in check
    • In U.K., gilt yields are fairly valued despite “bubble- like gains”, remain low yield believers; see 10s30s flattening a further 10bps-15bps
  • Morgan Stanley (strategists including Anton Heese)
    • Inflation data will matter more to ECB than growth data, expect other G4 markets to drive bunds
      • Pushed back expectations of further ECB easing to Sept. to Dec. meeting: MORE
    • Technical changes to ECB PSPP program may ease some scarcity issues; however don’t expect this to cause 10y bunds to sell off more than 5-10bps, 30y bunds 10-15bps
    • In U.K., rally in the long-end has potential to become self-reinforcing; 30y gilts outperformed dramatically cross-market in August, can continue to richen; go long 30Y gilts vs bunds
    • Turn bearish on peripheral spreads in near as ECB not likely to ease further in near term, supply due to restart
      • Suggest German 10s30s steepeners vs France as a way to fade bund scarcity premium; In the U.K., look at supply picture, net of QE, which is the lowest since 2012
    • EONIA curve poised to steepen if ECB rate cut arrives sooner or rate cut is taken off the table; continue to recommend paying 2y1y vs 1y (whites/greens) steepener to express steepening risk
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Oriane Parmentier (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)

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UUID: 7947283

HALISTER1: U.K Companies Could Face Tougher Corruption Laws Under May (1)

U.K Companies Could Face Tougher Corruption Laws Under May (1)

Alert: HALISTER1
Source: BN (Bloomberg News)

People
Jeremy Wright (United Kingdom of Great Britain and Northern Ireland)
Theresa May (United Kingdom of Great Britain and Northern Ireland)
David Cameron (United Kingdom of Great Britain and Northern Ireland)
David Green ((UK)Serious Fraud Office)

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UUID: 7947283

HALISTER1: Western Asset Management Favors India, Indonesia Bonds on Growth

Western Asset Management Favors India, Indonesia Bonds on Growth

(Bloomberg) -- The fund manager is overweight India and Indonesia due to the high growth potential of the two countries, says Desmond Soon, co-head of investment management for Asia ex-Japan at Western Asset Management
  • Favors Asian bonds on risks-adjusted basis, Soon says in a briefing in Hong Kong Monday.
  • U.S. Fed unlikely to take any rating action this year
  • “If institutional investors’ search for yield materializes in a large way, we are still in the early days of where the yields will go”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Desmond Soon (Western Asset Management Co)

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UUID: 7947283

HALISTER1: INSIDE TAIWAN: TWD Rises Most in More Than Three Weeks on Inflow

INSIDE TAIWAN: TWD Rises Most in More Than Three Weeks on Inflow

(Bloomberg) -- Taiwan dollar rises most in over 3 weeks as foreign investors resume buying of local equities after U.S. jobs data failed to strengthen Fed rate hike expectation.
  • TWD rises 0.6%, most since Aug 10, to 31.506 vs dollar after declining for 3 consecutive weeks
    • Overseas investors bought net TWD8.2b ($259.7m) local shares, most since Aug. 5; Taiex closes 1.14% higher, most since July 11, at 9090.13
  • Foreign capital inflows driving local currency and stock mkt up, traders say
    • But mkt somewhat subdued as overseas investors not selling USD in large amounts
  • Aug. CPI is due 8:30am Tuesday; est 1% y/y vs 1.23% in July
  • Low inflation gives CBC leeway to continue easing rates, BBH currency strategists led by Marc Chandler write in note today
    • Expect another 12.5 bps cut to 1.25% at next CBC quarterly policy meeting this month
    • Aug. exports likely decline 0.5% y/y and imports down 4.8% y/y: BBH
    • NOTE: Taiwan Aug. trade data due 4pm Sept. 7; exports est. to grow 0.2% y/y vs prev. 1.2% while imports may fall 4.5% y/y vs prev. -0.2%, according to Bloomberg survey
  • Market pricing suggests CBC could cut rate in Sept, Jih Sun Securities bond trader Kevin Shih says
    • Yield of 10-yr govt bond may trade within 0.66%-0.697% this week while for the month of Sept., the yield may range between 30-day and 90-day moving averages
  • Yield of 10-yr govt note falls 1 bp to 0.6790%
  • CBC sells TWD$160b ($5.07b) 364-day debt at an average interest rate of 0.342%, vs record low 0.338% in Aug.
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Marc Chandler (Brown Brothers Harriman & Co)

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UUID: 7947283