Halister News

--FERGAL O'BRIEN

(Bloomberg) -- Invesco Asset Management retains its small and long-term GBP overweight position against USD even as the trade may experience some pain in the short term heading into the Fed meeting, portfolio manager Sean Connery says in interview.

• Long-term view on sterling remains positive as U.K. will probably vote to remain in Europe and expectations for BOE rate increases are too extreme, with expected hikes priced too far out; they could be brought forward, offering support to sterling
• Trade initiated with GBP/USD at 1.40; says it would re- evaluate out the position on any breach of March 2009 low (1.35)
• Says “small” overweight position reflects the risk U.K. votes to leave Europe
• Fed meeting may represent a short-term headwind to sterling if U.S. central bank sounds hawkish
• Expects BOE meeting to be a non-event tomorrow, while Osborne will probably try to avoid sounding too negative and influencing consumer confidence ahead of referendum vote in June
• Volatility to remain high in the run-up to the vote; expect that U.K. will vote to remain even as says the referendum outcome remains too close to call
• Still, there is potential for good upside in sterling if U.K. votes to remain while a “leave” outcome would shock markets
• NOTE: Invesco total AUM was $740.9b as of Jan.31, according to data on its website
• NOTE: Chancellor Osborne to present budget later today; focus will then switch to BOE rate decision tomorrow; see what to watch for GBP risk events this week

(Bloomberg) -- Housing starts seen rising 4.6% m/m in Feb. to 1.150m annual rate after falling prior two months (forecast range 1.010m to 1.200m)

• Consumer price index seen falling 0.2% m/m in Feb. after showing no change in Jan.; would be 1st increase since Nov. (forecast range -0.5% to +0.3%)

(Bloomberg) -- “Market itself seems to be keyed in on the chance that the FOMC will have a hawkish tone, particularly if the inflation projections are revised up,” RBS strategist John Briggs says in note.

• “Whether it makes sense for the FOMC to be retreating from earlier policy guidance while simultaneously increasing its inflation outlook is an open question”
• Other observations from strategist morning notes:
• BMO (Aaron Kohli): “Perceived hawkishness or dovishness of the dots will likely be impacted by how sizable a reduction is made to 2018 and the longer-term rate,” and “in the same vein, any performance for the 5yr will hinge on how much those rates are lowered versus market expectations”
• CRT (David Ader): “Market’s response will largely be a function of how hawkish the FOMC is interpreted –- keeping in mind the statement and dot plot are released at the same time, we’ll look for the tone set in the text to offset the lower bias on projected rates and growth”
  • “A flatter curve in this context resonates with us, although the recent trend in 2s/10s suggests it’s already priced in”
• FTN (Jim Vogel): “Although the first move on a more dovish outcome should be a curve steepener, the greater probability in most scenarios favors a flatter curve after today”
• Marty Mitchell (independent): “This morning’s data is important, not because it will tilt the scales in favor of a rate hike today, but since it will factor in to the path of rates going forward”

(Bloomberg) -- Chancellor of the Exchequer George Osborne presents his budget amid doubts his full-year fiscal forecast will be met, and question marks over the feasibility of his plan to achieve a surplus by the end of his government’s term.

• For a roundup of views related to the pound, see here; for equities that may be affected by today’s announcement, see here
• These are the key themes to keep an eye on as Osborne speaks:

GROWTH, INFLATION

• The Office for Budget Responsibility raised 2016 and 2017 growth estimates in November, projecting 2.4% and 2.5% respectively; 2015 projection was unchanged at 2.4%
• But growth has been slower than was projected at the time, so a number of analysts expect downgrades today
• Inflation was expected at 1% y/y in 2016, accelerating to 1.8% and 1.9% in the subsequent two years

BORROWING/SURPLUS

• Osborne has introduced new fiscal rules stating the country must run a budget surplus from 2019/20, as long as the economy is growing, and that public sector net debt as a percentage of GDP falls each year
• At the time of the Autumn Statement, the OBR’s deficit forecast was GBP73.5b for the current year, GBP49.9b for 2016/17, and a surplus of GBP10.1b for 2019/2020
• The weaker economic backdrop and muted rate of wage growth has meant a smaller tax take, casting doubt on the forecasts; Osborne said this weekend a further GBP4b of spending cuts are needed

ASSET SALES

• In November, Osborne announced GBP5b of state-asset sales; Sky News reports he’ll call for a sale of Bradford & Bingley assets today
• Meanwhile, stake sales in RBS, Lloyds will probably continue to be delayed amid market volatility and ahead of the summer vote on Britain’s EU membership

GILT, T-BILLS REMIT

• The delays to some of the planned asset sales is one reason many analysts expect a sharp jump in issuance for the next financial year
• The median of 15 estimates from gilt primary dealers is for the DMO to sell GBP137b of securities for the year beginning in April, compared with GBP127.4b for the current year

ACHIEVABILITY

• Splits within the ruling party in the run-up to the ’Brexit’ vote, the government’s slim majority and years of austerity measures add to concerns Osborne has few options left to keep the U.K. on track to meet his targets
• Some observers suggest measures on tax avoidance, insurance premiums and fuel duty could be included to try and boost the coffers

BREXIT

• The chancellor is expected to make the case for staying in the EU as part of his speech, given an exit would probably have significant implications for the U.K. economy and BOE policy

(Bloomberg) -- Shire down as much as 4.4% as risk arb funds who received stock in the Baxalta placing yesterday are now selling Shire shares as a hedge, Olivetree’s Sebastian Greensmith says by phone.

• "We’ve seen elevated volume in Shire already so people have been pre-positioning their hedges": Greensmith
• Yesterday Baxalta announced a placing of $2.3b of stock, 61m shares, linked to a debt-for-equity swap by former parent co. Baxter
  • Baxter will exchange the shares of Baxalta for Baxter debt currently held by JPMorgan, BofA Merrill Lynch, Credit Suisse, UBS
  • Baxalta is not selling any shares, will not receive any proceeds from the stock offering or the debt-for-equity exchange
  • Following this debt-for-equity swap, Baxter’s stake in Baxalta will fall from ~13.8% to 5.1%
• NOTE: Placing of 61m shares is cacluating using reference price of $38.13 in Baxalta, yesterday’s close
  • Baxalta offering was first announced on March 11

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