Halister News

(Bloomberg) -- Odds of Brazil President Michel Temer falling rose to 70% from 20%, despite growing doubts over the evidence implicating him, Eurasia’s Joao Augusto de Castro Neves, Christopher Garman, Filipe Gruppelli Carvalho and Djania Savoldi write in report.

• Previous odds was based on fact that presidents can’t be held accountable for wrongdoings before their terms and underestimated “the carelessness of the current government for acts committed during its term”
• Strategy to discredit Joesley Batista and challenge the existing evidence may buy Temer some time, but sum of allegations still can’t be explained
• Conditions for Temer to cling on to power are increasingly precarious, political momentum should continue to build against him in Congress, courts, and in the streets
  • Temer to have a “very hard time cobbling together a coalition to approve reforms”
• Whether Temer’s fall will be swift or protracted will be critical for the reform outlook
  • Best outcome for reforms would be if Temer is ousted by the Electoral Court during trial of Rousseff-Temer ticket in 2014
• Temer can survive the turmoil if evidence remain inconclusive and Supreme Court accepts his petition to dismiss investigations
  • Should Temer survive (30% odds), “he is likely to approve only a very watered down version of pension reform”

(Bloomberg) -- Positive backdrop of increased risk appetite across euro-zone debt markets and “supportive comments" from officials and creditors will help keep Greek yields low, Antoine Bouvet, interest-rate strategist at Mizuho International, says in emailed comments.

• Greek 2-year bond yield trades 3bp lower at 5.63%, while 10-year bond yield is little changed at 5.71%
• NOTE: Euro-area finance ministers gather in Brussels on Monday to try to clinch a deal on easing Greece’s debt burden, which would resolve a stalled review of the country’s bailout and pave the way for a new set of rescue loans
• According to Bouvet, market will be looking closely at today’s talks, “but the bigger picture is EUR rates markets” and that “investors’ appetite for yield has improved markedly since the French election”
  • “What we anticipate is a greater willingness to take duration and spread risk from investors”

To contact the reporter on this story: Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma

(Bloomberg) -- Gilt futures called to open lower with bunds, Treasuries. GBP slips in Asian session as U.K. threatens to quit Brexit talks unless EU drops demand for an exit bill.

• Gilt market focus is on upcoming cash flows and index changes
  • Coupon-paying gilts go ex-div May 29, with GBP2.5b to be repaid. The 2032 gilt is set to drop out of 15y+ index, lengthening the index by 0.6 years on June 8; NatWest Markets recommend selling the 2032 bond vs 2046
• Gilt 10Y futures called to open at 128.20 (-0.09) RX ref: 161.28
• Called to open at 128.13 (-0.16) based on TY ref: 126.1
• NOTE: Opening call levels are derived from prices of equivalent bund futures since 7pm CET previous trading day; changes vs gilt closing prices at 7pm CET

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 Anil Varma

(Bloomberg) -- Bearish bias on EUR rates eases as SocGen unwinds short G-4 duration, NatWest Markets expects further drop in German yields, while Citigroup continues to see Japanification of bund curve.

• In gilts, focus on impact of index extension, with 2032 bond set to drop out of the 15y+ index. Some favor shorting Austria on spread given political risks. NatWest steps up bullish bias on BTPs, while Barclays also sees scope for further Italian bond performance

Morgan Stanley (strategists including Anton Heese)

• Magnitude of the rally in Bunds, German curve steepening, as well as the ECB rhetoric in recent weeks, help reaffirm the view that monetary policy renormalization will be gradual in pace, and the current sequencing is unlikely to be altered
  • Reiterate long June 2018 EONIA, which currently prices ~9bps of hikes, as by the time QE has been wound down it will still be too early for a hike
  • Keep long 2y ASW reflecting the view that Schatz will be better protected vs swap once the ECB starts to weaken the forward guidance in the June meeting, also provides a good hedge against a risk-off move if U.S. political uncertainty increases
  • Hold 3s30s German real yield steepener (25bps carry/roll for 3 month) as a better way to position for a rising term premium on the back of increased market expectations for ECB policy re-normalizing as a result of a more balanced growth and inflation outlook

NatWest Markets (strategists including Andrew Roberts)

• Hunt for trades that are over-owned and fade; market has been bearish global fixed income, still “do not buy this.” Target 10y bund below 0.30%, with 5y under -0.40%
• Market has positioned bearishly for Italy elections, this is premature, as markets enter a period of lighter supply and favorable seasonality; go long 10y BTP vs bunds with very high conviction, target 160bps (14bps away) but scope for as much as a 50bps move
  • Also recommend long BTP 7y either outright, vs 4y BTPs (cash-for-cash lengtheners to maximize directional exposure), or vs 3y France
• Recommend fading latest risk-off rally in bonds via short U.S. 10y vs bund, currently around 187.7bps, target 200bps, stop close below 179bps; 1m carry and roll on the trade is basically flat, aided by -1% in bund repo and steeper bund curve
• Hold short 10y Austria vs Netherlands (election risk trade) which made EU820k in the model portfolio as Austria underperformed markedly
• Gilt June coupon payments to provide some support for longs, GBP2.5b to be repaid with gilts going ex-div at close of business May 29; typical impact seen on the following business day
  • Index changes mean UKT 4.25% 2032 drops below 15y on 8th June; expect this bond to continue to underperform surrounding issues; see value in selling it vs 2046s as the issue likely to benefit most from the 0.6y index extension

BofAML (strategists including Erjon Satko)

• Corp issuance looks set to affect rates more than swap spreads, especially the 5-10y sector; issuance to remain historically high as issues withheld due to French election emerge, while corporates aim to front-load issuance ahead of further tapering
  • Analysis of corporate supply shows that the portion being swapped is likely to be much lower this year than in the past; in terms of impact on rates, corporate supply is still averaging just around 8y, suggesting that the long-term impact of unswapped issuance should mostly be bearish for the 10y sector
• U.K. long-end to be supported by UKT 2032 falling out of 15y+ index and this week’s supply leaving the DMO ahead of the pace; active investors with this benchmark might want to remove the idiosyncratic risk of an issue cheapening on exit by selling it early
  • Extension of +0.6 years in the 15y+ index reinforces the view that the ultra-longs will do well, both on the curve and versus swaps; recommend going long the UKT 2068 vs paying 10y20y (currently -1.8bps, targeting -30bps, stop at 40bps)

JPMorgan (strategists including Fabio Bassi)

• Near-term uncertainty, especially outside Europe has increased; based on expected money market repricing, forecast of 90bp 10Y Bund at year-end still looks reasonable; hold 30Y Bund shorts, 7s15s steepeners and keep June 2018/Sept. 2018 and Dec. 2017/Dec. 2019 ECB OIS curve steepener
• In EGB spreads, keep a medium-term defensive bias; hold core wideners, short 10Y France vs Germany, 27Y Austria vs Germany; prefer risk-on bias in the periphery with 3s10s Spain-Germany credit-curve flatteners; open long 9Y Slovenia vs RAGB given increasing political uncertainty in Austria, repricing of Slovenia after the recent supply- induced underperformance
• Stay medium-term bearish on Italy heading into year-end as ECB tapering, proximity to Italian elections might put markets under renewed pressure
• Declines in rates volatility driven by decline in macroeconomic volatility with fewer ‘delivered’ surprises; large excess reserves into the system meaning that shocks have not been amplified by shortage of liquidity; lack of a significant economic impact thus far from recent political surprises; rates volatility isn’t fundamentally mis-priced

Citigroup (strategists including Harvinder Sian)

• Consensus reflation theme is being challenged by the ongoing reversal of Trump-related drivers and increasingly China; the latter plays out for G-10 rates mostly via disinflation which should continue to work toward an ongoing Japanification of the Bund curve even on ECB QE exit
• Expect inflation risk compression to dominate in the near term, leaves 10y bund forecast for 3Q at 0.35%, before rising modestly to 0.4% in 4Q 2017 as scarcity ebbs but periphery risks mount into an Italian election in Feb. 2018
  • Without a recovery in inflation the Japanification of the German curve should mean that sub-1% yields will be long- lived
• Remain fundamentally constructive on Spain; recent GDP data highlight upside risks to current growth expectations, prospects of a rating upgrade are also evident given S&P’s positive outlook on the BBB+ rating
  • Near term, a reduction in political risk premia in Europe, ongoing QE and a benign supply profile should enable spreads to remain at their tight levels (if not grind tighter still); expect a drift wider in spreads in 2H on ECB tapering and the likely return of political headline risk

Barclays (strategists including Giuseppe Maraffino)

• BTPs will remain supported; expect ECB QE flows, low net issuance and a large short base to provide near-term support for Italian bonds; short/underweight positioning is still large, following the “massive increase” in repo transactions on special Italian sovereign bonds: MORE
• In terms of general views, continue to hold short-duration bias in EUR rates through reds/greens and Sept. 2017/Jan. 2018 EONIA steepeners; hold long Sept. 2017 Bund ASW vs EONIA
• In EGB spreads, maintain short 10y Spain vs Germany, as see much of the good news as priced in after French election, especially against a backdrop of a less dovish ECB

SocGen (strategists including Ciaran O’Hagan)

• Take off G-4 duration shorts and suggest turn neutral on duration; maintain longer-term bearish views, but upcoming vacation period may be a good time to position for carry
• Consider buying 10y Bund futures vs paying EUR 5y and 30y swaps; carry and roll-down is best in EUR 7y area, but prefer going out to 10s (among them, Bund futures offer attractive implied carry compared with swaps)
• See value in adding on PGBs over the summer, for carry and roll, or in a credit barbell vs BTPs, as political risk in Italy and challenging fundamentals contrast with a more upbeat outlook in Portugal and Spain
• Macron’s party is benefiting from rising support in the polls, which should help further spread compression in OATs, while supply pressure around the syndication can further unwind; recommend overweight 30y OAT outright and vs OLO

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) -- HSBC raises 2017-2019 earnings forecasts for Turkish banks and is most upbeat on state banks as it says public lenders showed the best growth momentum, analysts including Andrzej Nowaczek say in report.

• Says growth momentum for public lenders "sustainable"
  • Cites state banks’ relatively low loan-to-deposit ratio, fee income share in assets implying more upside and expectation that public sector deposits rate cuts will stay
• Raises 2017 earnings forecasts by 17% on average
• Expects net interest margins in 2Q to decline slightly, though sees banks increasing flat NIM guidance next quarter due to 55bps jump in 1Q
• Says recent advance in credit activity is not sustainable
  • Sees loan growth 20% this year and fall 11% in 2018
• Upgrades Vakifbank to buy vs hold, PT 7.20 liras vs 5 liras

To contact the reporter on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

--ANAND KRISHNAMOORTHY