Halister News

(Bloomberg) -- A vote against Italy’s constitutional reforms would be negative but may take several months to play out; impact of the U.S. presidential elections also likely won’t be felt until 2017, Deutsche Bank analysts including Jim Reid write in client note.

• Deutsche Bank trims year-end credit spread ests. for Europe and U.K.
• While a ‘no’ vote in Italy would likely lead to a wobble in markets, the worst case scenario of Five Star Movement winning in fresh general elections, and a more anti-Euro/EU approach, may still take some time to materialize
• The outlook for the U.S. economy may rest on how successful the next president is in pushing through fiscal spending plans; execution is a big issue for both especially with the need for it to pass through Congress; this will stretch into 2017
• Nearer term, the technicals are far better than Deutsche Bank had thought at start of 2016, supporting tighter spreads even as the U.S. in particular is in late cycle
• Forecasts tighter year-end spreads as the ECB and BOE are buying bonds and it’s difficult to fight them
  • Expects EUR IG non-financials to tighten to 95bps vs 130bps previously, all EUR HY to tighten to 410bps vs 435bps, GBP non-financials to 120bps vs 150bps
  • In GBP bonds, says BOE QE is already largely priced in but may see some more outperformance once eligibility is announced and purchases begin; GBP HY looks cheap vs IG
  • Constructive on bank credit including T2s and AT1s and on corporate hybrids
• Expect some EUR and GBP supply response to tighter spreads, but cautious about possibility of a flood of new issues as demand for credit is a key constraint
• The probability of an eventual sharper, sudden spread repricing has likely increased with recent central bank action; may need evidence of a recession (or a major negative event) before spreads respond negatively rather than just drifting wider