Halister News

(Bloomberg) -- Brazil Electoral Court ruling was favorable for President Temer, but his legal and political challenges may not be over, Goldman Sachs’ Chief Economist for Latin America Alberto Ramos writes in report.

• Temer’s governability has been weakened by recent developments and is unlikely to return to prior condition, even if he successfully overcomes potential legal challenges
  • “This reflects, in our assessment, what could well be an irreversible deterioration in political conditions and a loss of political capital by the Temer administration in Congress given, among other considerations, the shock to the political environment and the broad repercussions of the recent developments among the electorate and the press”
• President Temer’s key short-term challenges could be more political and social than legal, adding uncertainty and weakening the outlook for reforms: Ramos
• NOTE: Temer Rides Out Brazil Crisis for Now as Allies Seek Status Quo

To contact the reporter on this story: Leonardo Lara in Sao Paulo at llara1@bloomberg.net

(Bloomberg) -- Dovish ECB sees the bearish bias soften on EUR rates duration as markets weigh the potential for slower QE taper. Skew in front-end is still towards steepeners, though Deutsche Bank bucks the trend, recommends adding received positions in 1y1y Eonia.

• Focus on carry as strategists look to lower volatility in summer markets. ASW wideners are also in vogue with JPMorgan, Barclays and Morgan Stanley all recommending some form of expression

Deutsche Bank (strategists including Francis Yared)

• ECB showed firm commitment to the sequencing of policy changes, implies a later start to rate hike cycle
  • Recommend receiving 1y1y Eonia, target -33bps, stop loss -24bps; revision of 2019 inflation forecast to 1.6%, 2y-fwd 1y inflation breakeven at 1.16% suggests markets could easily push out the first rate hike by a couple of quarters
• Dovish bias from the ECB; recommend received position in EUR 5y5y vs USD, currently 114bps, target 130bps, stop loss of 100bps; the spread is at lower end of the range seen since the start of ECB QE program
• Current environment supportive of carry trades; recent PSPP monthly data show purchases above capital keys in France, Italy which is supportive of spreads
  • France 5s10s curve is steep given the level of France 2s5s curve and France-Germany 10y spreads; recommend a 5s10s flattener in France, currently 90.5bps, target 75bps, stop loss 100bps
• In BTPs, look for investors to gravitate toward the highest carry points, but unlikely to reach out to the very long-end of the curve; recommend a 7s30s steepener as the 7y sector has the highest carry and roll down
• Maintain German 10s30s flattener, looking for PSPP buying to push out the curve to match the average duration of the eligible universe

Morgan Stanley (strategists including Anton Heese)

• When ECB starts to normalize policy, expect this to impact swap rates first, as changes to the depo rate will have an immediate effect on Eonia, but collateral scarcity is likely to persist well after ECB has stops buying government bonds
  • This should lead to Bunds trading richer to swaps as yields rise, as result recommend being long 2y Schatz spreads at 56bps
• In the U.K., hung parliament increases political uncertainty, expect gilts to richen modestly as the MPC remains on hold
  • See the 5y sector outperforming due to being the best carry and roll point on the curve; 30y remains unusually rich vs 10y with pension fund demand remaining strong, see little catalyst for this to change
• Lack of rate hikes priced into U.K. front-end makes risk- reward of being short 2y gilts attractive; flatness of the curve means inexpensive in carry and roll to be short the front- end
  • Recommended 2s10s flatteners at 91bps, volatility weighted to remove some of the directionality of the trade with the level of yields

Barclays (strategists including Cagdas Aksu)

• Economists expect an extension of QE into 2018, reduction of purchase pace to EU35b-40b in 1H 2018 and EU15b-20b in 2H 2018, as well as two 10bps hikes in the deposit rate, in 2Q 2018 and 2Q 2018
• ECB has taken a broadly dovish stance; expect term premium to increase in the back end of the money market curve as the slower ECB is now, the more it will likely have to do in terms of policy normalization in a few years time (i.e. greens part of the curve); maintain reds/greens Eonia steepener
• ECB shows no urgency in QE tapering, summer cash flows, already low volatility, quieter swapped issuance, and long end paying flow risks from ESM are all arguments for holding long Bund ASW vs. EONIA view, even after its recent 10bp widening
• As a cheap ECB sequencing change trade, had previously recommended Sept. 2017/Jan. 2018 EONIA steepeners; but taking advantage of the recent market rally, see better value to push this trade out, and recommend converting it to pay May 2018 ECB dated EONIA at around -34bps

JPMorgan (strategists including Fabio Bassi)

• ECB and Italian politics create conflicting messages for the short and medium-term; In the short-term, ECB dovishness and reduced fears of an early vote in Italy favor carry trades, however still believe in the medium-term story of higher German yields and wider intra-EMU spreads
• Downplay the risk of carry seeking behavior on the German curve; look for higher yields as expect ECB to announce a reduction in the purchases at the Sept. meeting and core inflation will pick up, 10Y Bund yield not far from technical support at 0.16%-0.20%, expect the U.S. macro outlook to improve
  • Germany keep bearish bias: hold 7s15s steepeners, but look to re-entering 30Y Bund shorts at 1%
• Neutral on the short end of the curve; the amount of tightening priced into money market is too little, giving a bearish bias, but ongoing skew in the purchases towards shorter maturities might provide support to 2-3Y German bonds; continue to see a steepening bias stemming from the now clear policy of very short-dated purchases of German bonds 
• Expectations of ECB slow tapering should support wider swap spreads especially at the front end of the curve where QE purchases of German paper are concentrated; favor Sept. 2017 Schatz OIS swap spread widener but wait for 38-40bps level to enter the trade
• Stop out of a 10Y France-Germany widener, and tactically reduce the Italy underweight by closing Italy underweight vs Spain and Portugal trade but hold 3s10s Italy steepener vs Germany and overweight low coupon vs high coupon BTPs

Citigroup (strategists including Harvinder Sian)

• Fall in the 2019 ECB inflation projection infers more generosity on QE into 2018, given ECB forward guidance on a sustained movement to the inflation mandate
• As soon as QE looks longer and/or larger, then there will be more slippage against the capital key in Germany and other core markets, clearly favoring French and Italian paper, where longs in 30y look especially attractive
  • Scarcity issues would still support those areas of the German curve where the Bundesbank can buy, such as the short end and 15y+
• Despite dovish ECB, still believe grand bargain on QE may involve a small rate adjustment because the sequencing looks incongruent with banking risks the longer QE goes on
• With a supportive supply profile, a rather benign macro backdrop and summer seasonals, expect ongoing spread consolidation in the months ahead; look to fade some of the OLO outperformance on a cross-market basis

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) -- 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

UPGRADE

• Tegan Texofab
  • Long-term bank facilities raised to BB from BB- by Crisil
  • Cites stabilization of operations, wide application of products and better capacity utilization

--EDDIE BUCKLE

--EDDIE BUCKLE