Halister News

(Bloomberg) -- Core European bond yields face upside risks in the near term, UBS strategists including Reinhard Cluse write in a client note.

• Projected reactions to ECB

• Increase in monthly purchases
  • Expansion of eligible assets
    • EU0b-10b: Core yields rise initially and peripheral spreads widen as the market is disappointed
    • EU10b+: Core yields to fall initially due to the “flow effect” from QE2; but, over the medium-term, core yields rise and peripheral spreads tighten as the “fundamental effect” of QE starts to be priced in
  • No expansion of eligible asset pool
    • EU0b-10b: Core yields rise initially, peripheral spreads widen as the market is disappointed
    • EU5b-10b: Muted initial reaction in core markets and peripheral spreads
    • EU10b+: Core yields to fall initially due to the “flow effect” from QE2 but yields to rise over the medium-term as the “fundamental effect” of QE starts to be priced in

• Deposit rate cut
  • Cut
  • Splitting the deposit rate: Market should react to the weighted average rate by deposits and anticipate a declining EONIA rate over time
  • Cut > 12bp: Germany 2y moves to just below the deposit rate (if no rhetoric on possibility of more cuts); France 5y yields fall to below -25bp

• Extending the horizon of asset purchases
  • 6-mo.+: Initial flattening of core curves but may steepen over the medium-term as 10-30y yields rise
  • 3-6-mo.: Limited impact in isolation as markets already expect this

• Non-QE liquidity measures
  • New 3y+ TLTRO/LTRO: Limited market impact as take up likely to be low; liquidity is already high and money market fragmentation is not a concern
  • Extension of existing TLTRO program: no market impact

• UBS expects the ECB to increase its monthly asset purchases by at least EU10b (from EU60b) on March 10 and cut the depo rate by 10bp from -0.3%, probably with a tiered structure

(Bloomberg) -- Market bets that President Rousseff’s exit will open room for a more pro-economic reform govt have risen after former President Lula was detained by police for questioning in the widening so-called Carwash corruption scandal, according to analyst interviews and notes.

• While some analysts see a difficult path for any new government to implement reforms, others say hopes that the Workers Party, known as PT, may leave the power is driving optimism
• NOTE: Globonews says Lula’s testimony has concluded, and Lula said to refrain from answering questions; Lula set to speak to reporters at 2pm local time
• NOTE: BRL’s rally got boost after Isto É magazine reported yesterday Senator Delcidio Amaral gave testimony to prosecutors that may implicate Rousseff and Lula
• NOTE: Rousseff says all her govt actions follow Brazil’s constitution

REAL

• BRL +1.7% at 3.7358/USD, retracing after central bank failed to sell all swaps offered at auction; real earlier tested 200- DMA near 3.67, and is up around 7.6% for the week, which is best among 24 major currencies in EMFX; DI rates fall as a stronger BRL may help ease inflation; stocks surge

POLITICAL FALLOUT

• Leader of DEM, an opposition party, says it will try to install impeachment committee this month; calls allegations Rousseff interfered with Carwash investigation ’’startling’’
• Ruling PT party leader calls for support of Lula, saying ’’that show’’ is a threat to democratic order and ’’now, it’s street and war to prevent coup’’
• Many govt and PT supporters have used the word ’’coup’’ to refer to opposition attempts to impeach Rousseff and to investigations targeting Lula
  • G1 website reports Lula supporters and opponents protested at Sao Paulo airport, where the former president spoke to police

ANALYST COMMENTS

• MCM in report: hypothesis that VP Michel Temer could become Brazil’s President “has become quite plausible, enough so that it will lead to the development of prospective scenarios for various macroeconomic variables and for the conditions of governability under the command of the PMDB party
  • Possibility of Temer also being hit by some allegations can’t be ruled-out out
  • Process to impeach Rousseff won’t be resolved in less than 3-4 months

• Jive’s Leonardo Monoli: ‘‘Brazil is celebrating, looks like a finale of World Cup,” analyst says of market reaction to reports
  • Rousseff govt ’’is over’’; even if she continues, govt won’t have any support and positive agenda will start being discussed

• Modal’s Alvaro Bandeira: investors reversed bets on the worsening of the economy
  • “The market clearly wants a better government, one that’s credible and stable, and able to change economic policies that have led the country into this recession”

• Arkos Advice’s Lucas de Aragao: PT party can’t be ruled out yet for 2018 election as Lula still holds 20% support in polls
  • Rousseff impeachment may become basic scenario if March 13 anti-government protests in Brazil are strong
  • Police operation involving Lula distances PT from govt

• Garde’s Daniel Weeks: targeting Lula moves scandal closer to the heart of the government and the ruling PT Workers Party, increases further odds of Rousseff exit, as Lula is a key supporter of the president
  • Diminishes chances that PT will remain in power after 2018
  • “Foreign investors less exposed to Brazil may return since they see clearer prospects for a new government”
  • Uncertainties remain over timing and composition of any new government

• Eleven Financial’s Volpi Netto: “the market is reacting like Brazil woke up today as a whole new country, but a corruption investigation is hard, long and full of surprises”
  • “There’s room for profit taking on stocks as short-term investors play to make money, not to discuss politics”

(Bloomberg) -- Feb. jobs report released Friday “once again puts a check mark in the Fed’s employment mandate box, but it leaves the 2% inflation box unchecked” since wage growth was sluggish, Oxford Economics’ Gregory Daco writes in note.

• While inflation appears to be rebounding, part of that is due to “base effects”
• “We see the Fed adopting a cautious approach,” waiting until Sept. to raise rates again

(Bloomberg) -- Mkts and Fed “do not communicate well,” Fed “is likely to win” most of its disagreements with mkts on economy/central bank’s reaction function, BofAML economist Ethan Harris writes in note.

• BofAML sides with Fed’s view that U.S. economy is resilient, able to weather surge in USD and correction in risk assets
• “Biggest mispricing” in mkts is view that Fed will not be able to reach 2% inflation target
  • With unemployment approaching or surpassing NAIRU, “inflation has arrived on schedule”
• “Both sides bear some of the blame for the frequent disconnects” on issue of how much “data dependence” is influenced by global factors vs. U.S. labor mkt/inflation
• BofAML expects Fed to hike twice this yr, three times next yr; is concerned that mkts will be looking for specific guidance on timing of next rate increase

(Bloomberg) -- Given lack of “lendable float” from SOMA add-ons in 10Y, 30Y securities, it’s unlikely their “extreme specialness” in repo will dissipate, JPMorgan strategists led by Jay Barry write in note.

• Front-end USTs have “significantly larger lendable float,” given combination of high SOMA add-ons at auction as well as 2Y resulting in “unscheduled reopening” of existing 5Y note
  • SOMA add-ons in 10Y, 30Y auctions have added combined $3b in “lendable float”
• 10Y repo specialness “cyclical,” as 10Y has traded more than 70bps special in 1st mo. of qtrly auction cycle
  • Specialness to dissipate as Treasury reopens 10Y twice more in next 2 mos.
• NOTE: Current 10Y -2.65% as of 9:30am, ICAP data show

(Bloomberg) -- Initiate UST 5/30 curve steepener on “extreme richness” of 10Y, recent flattening of 5/30 curve vs its drivers, and supportive auction cyclicals, JPMorgan strategists led by Jay Barry say in March 3 note.

• Core inflation is firming, labor market improving, and Fed commentary suggests FOMC “will likely let employment conditions continue to tighten”
• Ahead of next week’s 3Y/10Y/30Y auction cycle, weighted steepeners entered 10 business days before 30Y auctions in 2015 and closed the day of the auction “offered consistent profitability”
• This “was likely driven partially by bloated dealer inventories,” and next week’s auctions “should also be difficult to digest” for same reason (See RATES POSITIONING SUMMARY)