Halister News

(Bloomberg) -- Long positioning in bonds into the selloff can make for further losses, with duration bias still bearish. Hawkish turn from central banks adds downside to inflation forwards, increasing the conviction at both Citigroup and NatWest Markets.

• Prospects for a Sept. ECB taper have risen. Morgan Stanley likes adding shorts in 2s10s30s bund fly to set up.
• In the U.K., bias remains for front-end steepeners/shorts, with Citigroup bucking the trend, and holds long in Nov. 2017 MPC-dated SONIA

Morgan Stanley (strategists including Anton Heese)

• ECB’s hawkish shift is in line with Morgan Stanley economists’ view that taper announcement will come in Sept. 2017; expect Bund yields to move higher gradually, belly of the curve to underperform ahead of the taper process
  • Recommend being short 10y on the 2s10s30s Bund fly to position for such a move with flat carry; this will be reinforced by the PSPP buying in the 1-5y sector of the curve
• Part of the reason for the aggressive selloff is due to markets’ light positioning ahead of the QE taper and the rich valuation embedded in Bunds, as well as the ease in the collateral scarcity issue
• Given muted reaction in spreads on the back of the hawkish turn, still comfortable holding long 5y BTP vs OAT as a carry trade into summer
  • Also BTP 10s30s flattener with 75:100 beta weighting, which captures the core rates curve flattening and credit curve extension in BTPs if the BTP-Bund spread remains tight into the summer

Deutsche Bank (strategists including Francis Yared)

• Draghi’s speech confirms baseline view that ECB will indicate a slow taper QE this year to EUR40bn per month starting from Jan. 2018
• Last week recommended short German 5y ASW, now suggest exiting this trade given spreads have tightened to correct the dislocation highlighted by models
• Recommends going long Schatz vs Bund Eonia ASW spreads at 9.6bps, target 20bps with a stop loss of 4bps; see Schatz-Eonia is not expensive compared to the implied repo vs Eonia, while implied repo on bund futures remains expensive and easing scarcity concerns may cheapen bund futures repo
  • Continue to hold paid position in the belly of EUR 5s10s30s curve, 1y1y/4y1y Eonia steepeners, received position in EUR 5y5y vs USD and 2s5s flatteners in Italy vs Spain
• In the U.K., market’s pricing of a “one and done” scenario from the BOE has left the front-end excessively flat, with 1y1y point looking historically cheap and the limited pace of hikes priced after the first 25bp rise
  • Steepeners are now attractive as the BOE is unlikely to communicate any policy tightening as a single event; recommend entering 1y1y/2y1y sonia steepener at 15bps, target 25bps, stop 10bp

Barclays (strategists including Cagdas Aksu)

• Recent market move is in line with our bearish bias on rates that we have expressed through short 10y Bunds and reds/greens EONIA steepeners; has seen mid-20bp level in 10y bund expensive for a number of reasons: MORE
• Expectations for tightening from the MPC have grown, but the market is not yet pricing a cycle
  • Money market curve in 2018 remains relatively flat and GBP2s5s is yet to steepen, despite the evolution of GBP 2s5s in previous rate tightening cycles shows that this is the period when it begins to come under steepening pressure

NatWest Markets (strategists including Andrew Roberts)

• Changing ECB call, now expect a 9-month QE extension from January 2018 at EU40bn a month as Draghi adds ‘persistence’ in monetary policy which suggests new guidance of less than six months is unlikely, while a recent ECB working paper points to greater effectiveness of longer guidance
• Fair value model for bunds is around 0.56%, around 9bps above current levels; positioning is long, but liquidity conditions still show no warning signs; this is not overly bearish signal, suggests bunds may tread water somewhat at current valuations; continue to keep flatteners in 10s30s BTP
• For those looking to sell, recommend targeting shorts in the U.K.; hawkish BOE risk has further to run as MPC clearly believe in policy normalisation, not “one and done” as markets price
  • U.K. underperformance trades continue to make sense (short U.K. vs U.S. or EUR) and sees risks of bear steepening extending beyond the 5y sector; hold 2y2y/5y5y steepeners and enter Feb. 2018/May 2018 SONIA steepeners
• Number one trade that jumps out is to be short of breakevens/forward inflation, modest rise in breakevens this past week (5y5y EMU CPI +6bps) should be taken advantage of; recommend selling or adding shorts in EUR 5y5y inflation forwards target 1.48%, stop 1.75%
• Signs of acceleration of defined benefit to defined contribution transfers brings with it risks of long-end steepening; recommend buying 4.25% 2046 vs 3.50% 2068 to enter 30s50s gilt steepener; entry levels are attractive and there are risks that defined benefit scheme liabilities can shorten

Citigroup (strategists including Harvinder Sian)

• Draghi was rightly interpreted as bearish as emphasis on temporary inflation headwinds and policy getting more accommodative as recovery progresses; positioning estimates suggests globally, 95% of longs are under water and that means the selloff can extend
• Sell 3-5y rates outright as the forward OIS curve looks less credible on QE exit and because sequencing talk can be seen; look for lower breakevens and target 5y5y BEI swaps at 1.3% (now 1.58%)
  • See more flattening in EUR 5s30s and German 10s30s, as markets will not buy into Draghi’s enthusiasm and real rates will look tighter and terminal rates will move lower
• Fair value for Bunds is near 0.35% and would look to reload longs close to 0.6%
• Reaction to Carney last week was excessive; markets screamed flip flop, but the speech was evidently not meant to signal an imminent hike
  • MPC debate is getting lively, but doubt a rate hike is coming; remain long in the very front- end (Nov. 2017 MPC Sonia); 10y yields are just about within post-election target range of 1%-1.25%, look for near-term consolidation
• Short position in U.K. 5y5y RPI swaps remains a core trade of 2017; it has been steadily falling all year and now extend the downside target to 3.10% given the hawkish shift on the MPC despite benign domestically generated inflation, this is bearish for inflation markets by capping reflationary potential

To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins

(Bloomberg) -- KPMG was never the auditor of offshore entities such as Accurate Investments or companies related to a diary-farming project in the Free State province, including Estina, consultancy’s southern Africa CEO, Trevor Hoole, says in statement on its website.

• “We strongly refute allegations that KPMG was involved in, or condoned, any alleged money-laundering activities”
• KPMG in South Africa resigned as auditors and advisers in April 2016 to the Oakbay Group companies, last sign-off as auditors was in respect of the February 2015 year-end
• Will cooperate fully with Independent Regulatory Board for Auditors in their investigation
• NOTE: June 30, KPMG Watched as Guptas Moved S. Africa Public Funds for Wedding Link
• NOTE: Hune 30, S. Africa Audit Regulator to Probe KPMG Review of Gupta Company Link

(Bloomberg) -- Here’s a roundup of Indian co. debt-rating changes.

• To get this story sent to your inbox real-time, run NI INRATINGS, click on Display & Edit, then Set Alert Delivery

DOWNGRADES

• A P Fashions
  • Long-term bank facilities cut to BB- from BB at Crisil
  • Cites lower-than-expected accruals, high working capital requirements
• APL Metals
  • LT bank facilities cut to C from B- at Crisil
  • Cites irregularities in servicing debt on unrated facilities
• D. S. Kulkarni Developers
  • NCDs cut to D from C at Care
  • Cites inability to service interest obligations
• Kanishk Gold
  • LT bank facilities cut to D from A- at Crisil
  • Cites delays in servicing of debt obligations
• Janalakshmi Financial
  • LT bank facilities cut to A from A+ at ICRA, NCDs also downgraded A from A+ at ICRA
  • Cites continued deterioration in asset quality
• Talib and Shamsi Constructions
  • LT bank facilities cut to BBB from BBB+ at Crisil
  • Cites sharp decline in revenue, stretch in working capital cycle
• The State Trading Corporation
  • LT bank facilities cut to D from BB+ at Care
  • Cites weak financial profile due to volatile operating income

UPGRADES

• Calcutta Springs
  • LT bank facilities raised to BB+ from BB at Crisil
  • Cites Calspring group’s comfortable financial risk profile and liquidity
• Golflinks Software
  • LT bank facilities raised to A+(SO) from BBB(SO) at Crisil
  • Cites strong improvement in average debt servicing metrics
• Laxmi Diamond
  • Fund-based working capital limits raised to A from A- at India Ratings
  • Cites improving credit metrics
• Himatsingka Seide
  • LT bank facilities raised to A from A- at Crisil
  • Cites gradual ramp-up in utilization of enhanced bedsheet facilities
• Hindalco Industries
  • LT bank facilities raised to AA from AA- at Crisil; NCDs also upgraded to AA from AA-
  • Cites improvement in gross debt to EBITDA supported by deleveraging of balance sheet and improvement in operating performance
• Shree Gowthamee Rice
  • LT bank facilities raised to BB from BB- at Crisil
  • Cites sustained profitability, higher revenues
• Speciality Sintered
  • LT bank facilities raised to BB from BB- at Crisil
  • Cites healthy revenue growth
• Srijan Realty
  • LT bank facilities raised to BBB+ from BBB at Crisil
  • Cites healthy booking and construction progress despite subdued demand
• Vijayasri Organics
  • LT bank facilities raised to B- from D at Crisil
  • Cites timely repayment of LT debt for past six months through June

Economic Release Details: {JNTSMFG Index ECOD} --JAMES MAYGER