HALISTER1: Fidelity Likes Italy, Spain Debt; Risk Bid Intact After Brussels

Fidelity Likes Italy, Spain Debt; Risk Bid Intact After Brussels

(Bloomberg) -- European risk assets look attractive and have room to gain, Dierk Brandenburg, sovereign analyst at Fidelity International, says in interview on Tuesday.
  • Among peripheral bond markets, Brandenburg favors Italian and Spanish debt
  • NOTE: Fidelity’s Luxembourg-based Euro Bond Fund holds BTPs due from 2019 to 2044, with the biggest exposure to 2024 maturity, Bloomberg data show; fund also holds Spain 2020, 2024, 2044 debt
  • Brussels attacks raise questions over progress on any agreement on Europe’s refugee crisis, though underlying European fundamentals aren’t as bad as they appear; European spreads are cheap
    • Attacks will probably cast a shadow over Europe’s future and may have longer-term impact on consumer confidence and GDP; that said, ECB easing plays in favor of growth
  • Risk-on environment may worsen into June 23 referendum on U.K. EU membership, amid increased uncertainty in U.K. and Europe outlook
    • Would favor neutral stance on gilts into vote as they have already rallied a lot, reflecting “Brexit” risk, expectations for slower U.K. growth and no BOE hikes anytime soon
  • NOTE: Fidelity’s Luxembourg-based European High-Yield Fund holds Greek 2028, 2029, 2019 bonds: Bloomberg data
  • Brandenburg says fund exposure to longer-term Greek bonds reflects lower cash prices; also reflects view that long- term bonds are likely to repay the same amount as more expensive shorter-term ones, in event of a debt restructuring
    • For Greek bonds to become attractive again, country has to show it’s willing to cooperate with Europe on refugee crisis; geopolitical factors probably more important than domestic issues currently
  • NOTE: Fidelity AUM at $258.4B as Sept. 30, according to website
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Dierk Brandenburg (Fidelity Investment Management Ltd)

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UUID: 7947283

HALISTER1: WHAT TO WATCH: Undecideds Making Up Minds Is Key to Brexit Vote

WHAT TO WATCH: Undecideds Making Up Minds Is Key to Brexit Vote

(Bloomberg) -- Opinion polls will be eyed for signs that recent events have helped undecided U.K. voters to make their minds up on whether U.K. should stay in or leave the EU.
  • Developments that could have had some influence include the testimony by London Mayor Johnson, who backs U.K. leaving EU, and Chancellor Osborne, who supports ongoing membership
    • Also, the resignation of a pro-‘leave’ govt minister and the bomb attacks in Brussels
  • NOTE: GBP/USD 3-mo. implied vol is at its highest levels since June 2010 as investors increasingly looking to hedge against the odds of a potential exit
  • WHAT’S THE LATEST?
  • ICM survey conducted between March 18 and 20 showed a reversal of the prior week’s two-point lead for remain, with 43% saying they would vote for leave; 16% remain undecided
  • Before that poll, PM David Cameron said the result is on a knife edge and could be decided on who bothers to vote
  • Over the weekend, Iain Duncan Smith quit, plunging the Conservative Party into one of its biggest crises since 2010, something Morgan Stanley analyst Hans Redeker says may increase “Brexit” risks
  • UBS WM economist O’Neill say the dynamics between local organizations, MPs and the front bench will also be of interest
  • While the polls didn’t shift significantly after Boris Johnson said he will campaign to leave, analysts say he can sway voters if he starts to campaign more actively
    • Today, he told MPs that the risks related to ‘Brexit’ have been overplayed, the U.K. could do a deal with EU after a ‘leave’ vote very quickly and the City of London would flourish
  • The BOE joined the debate this month, saying uncertainty stemming ahead of the vote may delay investment decisions and curb growth, although Kristin Forbes went on to say this week there’s not yet enough data to estimate the effects
  • Prologis, the world’s largest owner of industrial real estate, would like to buy more property in the U.K but said it’s unlikely before the U.K. decides whether it wants to stay
  • Global investors have cut their allocation to U.K. equities this month to net 20% underweight from net 17% underweight
  • WHAT’S NEXT?
  • Chancellor of Exchequer George Osborne is scheduled to speak to MPs tomorrow
  • The Electoral Commission’s deadline to determine the official “leave” and “remain” campaigns is April 14; the decision gives the lead campaign groups higher spending limits
  • The following day marks the start of the referendum period
  • The EU response to Brussels attacks and the successful implementation of the deal with Turkey to stem the flow of migration will be key factors to watch as JPMorgan says successful implementation lowers the likelihood of ‘Brexit’
  • UBS Wealth Management analyst Ricardo Garcia says if it leads to lower inflows of migrants that will be more important in voter minds than yday’s events in Brussels
    • Once the campaign starts formally and PM Cameron campaigns more pro-actively, it will be important to see if the undecideds make up their minds and which campaign they back; expect most to favor staying in the EU, he adds
  • Rabobank analysts say the implications of the blasts in Brussels aren’t entirely clear as posturing by the anti- Europe UKIP could tarnish the party and it is possible the attacks elicits both sympathy and solidarity from the U.K. population given the long history of living with the threat of terrorism
  • WHAT’S THE LIKELY REFERENDUM OUTCOME?
  • Polls show the remain and leave campaigns fairly balanced, but with don’t knows ranging between 16% and 28% in surveys since the end of Feb
    • There have been no phone polls, which have tended to show greater support for staying in the EU, in the past month
  • Citigroup says 38% of polls YTD show a majority voting for an EU exit vs 16% in 2H 2015
  • RBC says betting markets are a better gauge of implied probabilities and these show a jump in the likelihood of a leave vote in recent days to near their peak ~40%
  • UBS WM sees around a 30% chance of Brexit while Citigroup put the likelihood at 30% to 40%
  • WHAT HAPPENS IF THE REMAIN CAMP WINS?
  • The vote may spur persistent political and economic uncertainties that may not end even if the country votes to stay, Citigroup says
  • Even if the U.K. voted to remain in the EU, those divisions could lead to an early election, Morgan Stanley analysts say
  • If the U.K. votes against Brexit, the BOE could lift rates as soon as November, ING analysts say
  • Morgan Stanley economists disagree, saying even with a ‘remain’ vote, slower growth and weaker inflation would push the first rate increase back to early 2017
  • BNY Mellon analysts point out that GBP strength after the Scottish referendum faded just hours after the result, while Morgan Stanley say GBP could recover slightly but won’t retrace all of its fall since mid-2015
    • Julius Baer analysts see asymmetrical downside risks for sterling; they don’t believe in a long-lasting relief rally in case of a “No” and see a slightly weaker EUR/GBP at 0.84 on a 12-mo. horizon
  • WHAT HAPPENS ON A BREXIT?
  • There’s much debate with EU provisions suggesting negotiations can take up to two years but some commentators saying, if needed, that period could be extended
  • In the worst case, the economy would be 3.9% smaller by 2030 compared with staying in the bloc and GBP21.1b of business investment would be lost, Oxford Economics says
    • The best case sees a loss of 0.1% in GDP
  • GBP may fall 10% to 20%: analysts from Barclays to HSBC
  • British manufacturers, retailers and universities may see their credit ratings slide and economic growth may slow if the U.K. votes to leave: Moody’s Investors Service say
  • Fund managers Aberdeen, Henderson face the largest operational risks in a ‘Brexit,’ scenario, UBS equity analysts say and the U.K. retail sector may de-rate, the bank says
  • A vote in favor of exiting will spawn the deepest market slump since the Greek debt crisis and the region’s HY bonds will be among the biggest losers, analysts and investors say
  • And Credit Suisse economists say a Brexit event would have wide-ranging negative economic consequences beyond the U.K. most likely including a recession in the euro area, something that doesn’t yet appear priced in the G-10 FX vol curves
  • HOW TO TRADE IT?
  • Longer-term investors don’t appear to be adequately hedged against Brexit risk, JPMorgan strategists write
  • Nomura recommends a tactical GBP/USD short exposure expiring
  • HSBC says long CHF is the best hedge against the risk of Brexit
  • ING analysts recommend sterling strip steepeners, buying Dec-16 and selling Dec-17 contract, given the rate-rise cycle may begin soon after a remain vote and any easing on a leave vote may be reversed in 2017
  • Brexit risks and increased ECB purchases also present bullish case for long-end EUR rates so recommend buying EUR 10s30s conditional bull-flatteners with 1-month expiry, SocGen says
  • In stocks, Barclays recommends U.K. stocks with dollar exposure, FTSE 100 companies and consumer staples
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Boris Johnson (Greater London Authority)
David Cameron (United Kingdom of Great Britain and Northern Ireland)
George Osborne (United Kingdom of Great Britain and Northern Ireland)
Hans-Guenter Redeker (Morgan Stanley)
Iain Duncan Smith (United Kingdom of Great Britain and Northern Ireland)

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UUID: 7947283

HALISTER1: UST MORNING CALL: ‘A Period of Seasonal Strength’ Is Ahead

UST MORNING CALL: ‘A Period of Seasonal Strength’ Is Ahead

(Bloomberg) -- “We are exiting a period of seasonal weakness for bonds and are heading into what is typically a period of seasonal strength during April,” independent strategist Marty Mitchell says in note.
  • “Longer-term momentum indicators in the bond market are oversold and in need to correcting back to neutral and to overbought,” which “argues for lower yields in the next few weeks”
  • “Attractive valuations vs overseas debt markets” should “also be supportive of a bond market rally”
  • Other observations from strategist morning notes:
  • CRT (David Ader): “With our bullish bias still intact and the data calendar limited to mortgage apps and new home sales on Wednesday, we remain cautious of the potential for the influence of corporate deal pricings to provide upward pressure on the market –- either from hedging or simply making room for the new supply”
  • FTN (Jim Vogel): “In a thin market, just the quick liquidation in futures on Evans’s benign remarks was enough to further weaken technicals,” and “resistance to last week’s rally was so strong at 1.85% it will take a series of events to get to the low 1.80s”
  • RBS (John Briggs): “Fed is buying time, not only to watch the data, but in the way of financial conditions and the market itself. Knowing they would not hike in March, and it was unlikely in April, the best way to keep stocks up and the dollar down was to be dovish for now”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
David Ader (CRT Capital Group LLC)
Jim Vogel (Ftn Financial)
John Briggs (RBS Securities Inc)
Marty Mitchell (The Mitchell Market Report LLC)

Topics
UST Morning Call

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UUID: 7947283