Halister News

--SHELLEY SMITH

(Bloomberg) -- Higher EUR headline inflation and the prospect of reaching purchase limit on several EGBs make a ECB tapering decision likely, Societe Generale strategist Adam Kurpiel writes in client note.

• In Q4, the ECB will have to decide about the future of its asset-purchase program, officially expected to end in March 2017 or later
• Buy EUR 6-mo. expiry single-look 10Y CMS ATM cap contingent on EUR 2Y rate remaining below ATM+10bp
• Headline inflation going toward 2% in early 2017, the Fed’s policy normalisation and the nearing tapering of the ECB’s APP imply bear-steepening risks to the EUR curve in late 2016, with front and intermediate sectors anchored by durably low-key policy rates and 4y maturity TLTRO II
• Trade benefits from persistently cheap EUR long rates volatility despite upcoming event risks
• Risks: Premium is lost if EUR 10Y rate remains low or if the 2Y rate increases above the ATMF+10bp barrier around -0.05%

(Bloomberg) -- The changing contours of opinion polls on the June 23 referendum and questions about their reliability in forecasting the outcome continue to dominate sterling trading.

• Pound trades at 3-week low vs yen and Swiss franc, GBP/USD 2-wk volatility continues to climb, while European stocks trail their U.S. peers; equities, equity vols and skew, rates, credit, currencies, commodities, even coffee, are moving in sync with Brexit probability, SG says
• GBP corporate credit may continue to underperform EUR counterparts even if the U.K. votes to remain within the EU, Bloomberg strategist Simon Ballard writes
• TV debates and developments in the migrant crisis could all still impact the result while voter turnout remains a key focus for many analysts

WHAT’S THE LATEST?

• Registration deadline has been extended to midnight Thursday after technical “issues” meant many people were prevented from signing up in time
  • 525,000 people registered on Tuesday; that provides a timely boost to Remain campaign, Panmure Gordon analysts say in client note
• A Times/YouGov poll shows support for remain at 43% and for leave at 42%, while online poll shows 48% leave, 43% remain and 9% undecided, according to ICM statement on website
  • The What U.K. Thinks poll of poll shows remain with a 2ppt lead
• Brexit probability rises to 24.4%, according to Bloomberg Brexit Tracker, compiled by political blogger Matt Singh, while oddschecker.com shows betting odds of a leave win edges back to 29.5% vs YTD peak of 36.8%, according to oddschecker.com
• Hitachi says Brexit would force a rethink of the firm’s U.K. operations, while WPP says would have to add jobs in markets affected by Brexit such as Spain and Germany
• Norway Wealth Fund will remain a long-term investor in the U.K. regardless of the outcome of the vote, CEO Yngve Slyngstad says

WHAT’S NEXT?

• ITV features debate today, with political figures from both campaigns
• Leader of the opposition to answer questions on the referendum on June 20 on Sky News
• BBC will host TV debates June 15 and June 21
• The June 21 debate may prove to be a key market event, Credit Suisse says in a client note
• Campaigns are expected to turn their focus to encouraging the electorate to vote; turnout could play a vital role, Jamie Searle at Citigroup writes in client note; The lower the turnout, the better it is thought to be for “leave”

WHAT’S THE LIKELY REFERENDUM OUTCOME?

• Remain’s lead in Standard Chartered’s poll of polls is 7ppt, suggesting the outcome is still uncertain
• Citigroup analysts said last week they are increasingly concerned on the polls and the implication for domestic political stability after the vote due to growing rancor within the Conservative Party
• JPMorgan’s Malcolm Barr though says the supposed move toward leave looks more like noise than signal
• SEB says probably need a 10ppt lead in polls to be certain they’re predicting the outcome correctly; Standard Chartered would review downside call for the GBP, if poll of polls consistently showed more than a 13ppt lead for remain, analyst Eimear Daly writes
• Estimated odds of Brexit by UBS WM, Citigroup, IHS, SocGen and Eurasia range from ~30% to 40%; Julius Baer cut the est. probability to 30% vs 30%-40%

WHAT HAPPENS IF THE REMAIN CAMP WINS?

• Even if the U.K. votes to remain in the EU, divisions resulting from the vote could lead to early elections, according to Morgan Stanley analysts
  • The bank’s economists say even if the “Remain” camp wins, slower growth and weaker inflation would push a BOE rate increase back to early 2017
• Meanwhile, ING analysts say if the U.K. votes against Brexit, the BOE could lift rates as soon as Nov.; BNY Mellon analysts note GBP strength after the Scottish referendum faded just hours after the result
• Julian Wolfson, co-head of research & political strategist at Odey Asset Management, says issues are likely to continue even if the U.K. votes to stay and Brexit risk could linger for GBP

WHAT HAPPENS ON A BREXIT?

• Govt paper on the process of withdrawing from the EU shows U.K. and union members will have 2 years to negotiate initially; period can be extended if all remaining 27 members agree
• Much of debate over a potential exit centers on how easy it will be for the U.K. to sign new trade deals and whether the country becomes a less attractive place to invest outside the EU
• BofAML economists say an exit would mean the U.K. would have to renegotiate deals with other regions in addition to Europe; populist backlash in the U.S. and elsewhere may make new agreements difficult
• Large current-account deficit is one of U.K.’s key economic vulnerabilities, CBA analysts write in note
  • Uncertainty after a “leave” vote could increase risk premia in GBP assets; investors would want higher rate of return to compensate for perceived risks or may simply reduce exposures
• Replacing lost FDI likely to spur higher risk premia in a range of sterling assets, BOE deputy governor Ben Broadbent said last month
• MPC won’t be able to immediately offset all effects of shocks, Carney said
• Capital Economics says ECB may need to take further action; such an outcome could cause financial-market volatility, potentially adverse effects on euro-area economy and financial sector
• In event of Brexit, “referendum-itis” will be catching from Catalonia to Netherlands, in France could change the outcome of next year’s presidential election, Wolfson says

• HOW TO TRADE IT?
• CURRENCIES
• GBP/CHF and EUR/CHF downside trades expected to perform well in the event of a ’Leave’ vote, EUR/GBP seen moving sharply toward 0.70 if voters choose to remain in the EU: Goldman Sachs
• Added a short cash position in GBP/JPY Friday; also has short exposure through a long-standing cable put spread; expect renewed premium to build into vote, JPM says
• Danske Bank advises clients to hedge for a weaker pound vs euro and a weaker euro vs dollar and franc

• RATES, CREDIT
• Finance GBP 5Y tail payer spreads by selling EUR mid-curve payers, Societe Generale strategist Adam Kurpiel writes in client note
• Buy 10Y U.S. and sell 10Y Italy or Spain, UBS analysts said in May 22 note; numerous risks have potential to drive periphery spreads wider, including EU referendum, Spanish politics and possible limits on banks’ sovereign bond holdings
• Commerzbank favors cautious stance toward sovereign spreads and SSAs; Brexit tail risk unlikely to get priced out completely; pending Fed rate rise a risk for yields and spreads

• EQUITIES
• Amundi has cut exposure to European assets including equities and fixed income, CIO Pascal Blanque says
• Uncertainty before vote has spurred a rise in both equity risk premium and implied volatility on European stocks vs U.S. to near-historical highs, Barclays says
• Credit Suisse suggests Long FTSE 100 vs FTSE 250 as a Brexit hedge
• If Britain remains in the EU, Pioneer Investments sees good buying opportunities on small caps and domestic cos
• Commercial real estate and house prices are likely to fall due to deteriorating credit conditions if Brexit occurs, while a drop in GBP may boost profit at U.K. Asset managers, according to analysts
• For other views on how to trade Brexit, click here and for GBP forecasts here

(Bloomberg) -- ECB’s CSPP program is providing fillip for the broader EUR corporate bond space amid signs the ECB has greater risk tolerance at this early stage than perhaps many investors had been expecting, Bloomberg strategist Simon Ballard writes.

• CSPP should remain key support for EU credit spreads over coming months; but could be some disappointment post July 18 if liquidity constraints mean purchases fall well short of assumed EU5b plus per month target
• Asian credit mkts cautious overnight; may damp EU credit mkt sentiment at open this morning
  • Persistently anemic global macro outlook can weigh on outlook for credit fundamentals; South Korea surprise rate cut o/night citing growing economic risks, slowing global trade and govt push to restructure indebted companies
• ECB CSPP appears to create solid support for risk appetite model as spread dispersion continues to compress
• CDX IG closed +0.2bps at 73.63 in overnight session; iTraxx Asia Ex Japan IG currently -0.3bps at 138.50

NEWS

• Corporate News
• Remy Cointreau Forecasts Higher Profit as Cognac Sales Rebound
• Home Retail 1Q Argos LFL Sales Up 0.1%, Gross Margin Down 100bps
• Rolls-Royce CEO Warns of ‘Higher Risk’ in Letter to Employees
• LG Electronics Rises as Kiwoom Sees 2Q Earnings Will Jump 152%
• Flybe Group FY Rev Rises 8.7%, Sees 1H 17% Capacity Increase
• Wincanton FY Rev. In Line; Sees Div. Growth to Match Earnings
• Systemair 4Q Profit Beats Estimates; Maintains Margin Target
• Tencent Said to Weigh Supercell Deal at $9 Billion Valuation

• Financial News
• Japanese Banks Expand to Ranks of World’s Biggest Energy Lenders
• Delta Lloyd Reports Successful Sale of Van Lanschot Stake
• Biggest Bank Quitting Japan Bond Club Shows BOJ Crushing Market

• Credit Rating News
• Fitch Affirms Coca-Cola Amatil Ltd at ’BBB+’; Outlook Stable
• Banks exposed to ’credit negative’ risk from Aussie housing, warns Moody’s

• Other News
• Draghi Seen Buying Junk Debt Shows ECB Will Do Whatever It Takes
• In Europe, Analyst Profit Upgrades Now Exceed Downgrades: Chart
• EU’s Buti: ‘No Contingency Plan’ for Europe in Case of Brexit

ANALYST VIEWS

• Secondary market liquidity is set to worsen, spreads might crunch tighter given that the ECB will be in the mkt everyday. (Even) if we get some macro vol that sees selling from investors...the ECB will be there to say “thank you very much, that will do nicely”: creditmarketdaily.com

NEW ISSUES

• State of Berlin EU250m 1% 5/2032 Tap MS +9
• Braas Monier EU435m 5NC2 Notes 3%
• JAB Holdings EU150m 1.75% 2023 Tap MS +133
• RATP EU500m 8Y FRTR +35
• European IG credit pipeline here and HY credit pipeline here
• Issuers exposed to S-T rollover and interest-rate reset risk here

• 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) -- Neuberger Berman will add bond positions in India, Indonesia and China in the event of yield spikes which are not triggered by domestic fundamentals, Prashant Singh, Singapore-based senior portfolio manager for emerging markets debt at the fund, says in interview.

• Fund likes owning duration at moment
• Macro fundamentals remain strongly favorable for those bonds
• Impact from any Fed tightening would be relatively contained for above markets
• Asian central banks are accommodative and liquidity is fairly flush in the region
• India and Indonesia are high yielders and carry provides some buffer from a total return perspective
• More cautious on Asian currencies at the moment, especially after the sharp rally post-NFP last week and event risks coming up
  • Has hedged positions where it’s not contructive on currency, may be happy to take full exposure in others

• CHINA:
  • Chinese yields primarily driven by domestic factors
  • Domestic bonds not as strongly linked with external markets
  • Broader growth trajectory, inflation trends give a good case to be constructive
  • Base case is for China growth moderation to continue in “very gradual manner”
  • Expects very gradual depreciation path for CNY; any imminent devaluation is unwarranted and unlikely

• INDIA:
  • Room for more monetary easing in India, but not immediately
  • Constructive bond view on India is predicated on monetary transmission being more efficient
  • NOTE: RBI held rates steady on June 7, but said its stance remains ’’accommodative’’

• MALAYSIA:
  • Maintains overall neutral stance on Malaysian bonds
  • While 1MDB concerns can impact sentiment in near term, Malaysian bonds are reasonably fairly priced from a valuation perspective

• NOTE: Indonesia govt bonds have returned 5.11% in the past 3 months while India has fetched 4.12%, highest among major Asian countries
• NOTE: Neuberger Berman manages $110.6b in fixed income assets, according to information from fund website

(Bloomberg) -- USD/KRW non-deliverable forwards account for 56.9% of total volume today, according to trades reported to DTCC; USD/INR second-most active at 13.1%, USD/MYR third at 12.5%.

• Total volume was $9.4b as of 2:43pm HKT; global total yday was $79.96b, with USD/KRW accounting for 20.6%
• NOTE: Bank of Korea research roundup here