Time to Get Tactical on European Rates as Returns Set to Dwindle

© Reuters.  Time to Get Tactical on European Rates as Returns Set to Dwindle © Reuters. Time to Get Tactical on European Rates as Returns Set to Dwindle

(Bloomberg) — Investors may have to get more tactical in 2020 given the impressive returns from European government bonds this year could become much harder to achieve.

may well remain in a broad range. Euro-area cyclical indicators have risen off recent lows and if the U.S. and China reach an initial trade deal then yields will likely reprice higher ahead of economic data improving. However, a strong recovery and higher inflation remains elusive, narrowing the room for yields to increase above 0%.

The space for yields to fall will be limited in the case of a stagnating economy. The bar is high for substantial additional ECB easing given divisions within the Governing Council as arguments grow against negative rates. New record-low yields would likely require a significant economic downturn.

  • Net, trading bunds may be more tactical in nature within a broad range, and conditional option structures make sense. Upside yield risk comes from a possible U.S.-China trade deal and capex rebound vs downside risk of escalation. Bunds are looking to end this year not far from fair value (currently 10bps cheap) when modeled against macro fundamentals.
  • Carry is scarce but historically low rates and volatility implies investors will continue to seek value to meet yield goals. Potential of limited returns from capital appreciation and low levels of core yields leaves carry in focus.
  • Peripheral spreads’ strong 2019 performance restricts the room for further tightening and may well depend on lower core yields, but the high carry on offer in a low-return world may be too enticing for investors. Any bouts of widening on profit-taking and seasonally high supply at the start of the year may be bought if political volatility remains contained and with supportive ECB QE vs lack of net supply.
  • The argument against persistently negative yields and the reversal rate debate may gain traction next year. This can be hedged through expressions such as: paying ECB-dated OIS, selling weighted payer spreads or buying Schatz puts. The swaptions market prices only a small probability of the ECB cutting rates further.
  • Re-anchoring of inflation expectations looks out-of-sight, and there is some risk of a policy mistake given diverging views within the ECB Governing Council and new leadership.
  • A situation where inflation remains stuck, the economy is stagnating and ECB stays on hold will support carry trades. The highest roll-down in EUR forward swaps is in the belly between 5y and 10y tenors, although not historically high. Receiving on shorter-tenors may be favored to avoid the risk of bear-steepening, and with the short-end having nearly priced out ECB cuts.
  • NOTE: Tanvir Sandhu is a global fixed income and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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European equities mildly higher to start the day

Trade hopes are keeping equities a little more cheerful for now

  • Eurostoxx +0.3%
  • Germany DAX +0.3%
  • France CAC 40 +0.3%
  • UK FTSE +0.3%
  • Italy MIB +0.4%

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Equity investors continue to take heart in the earlier story that China is waiving tariffs on some US farm products, and that is keeping stocks slightly higher to start the session.

There’s still plenty of potential pitfalls though during the day with US non-farm payrolls a key risk event to watch later today. Otherwise, be wary of more trade headlines as we count down to the 15 December tariffs deadline next week.

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ForexLive European FX news wrap: Risk slumps as Trump sees no deadline for trade deal

Forex news from the European morning session – 3 December 2019

Headlines:

Markets:

  • GBP leads, EUR and CAD lag on the day
  • European equities mixed; E-minis down 0.3%
  • US 10-year yields down 2.8 bps to 1.791%
  • Gold up 0.4% to $ 1,468.59
  • WTI down 0.3% to $ 55.81
  • Bitcoin down 0.4% to $ 7,287

EOD 03-12
Markets were initially more steady to start the day with the yen sitting a little weaker and the likes of the aussie and kiwi underpinned. The latter was helped by the RBA keeping its cash rate steady but things all changed when Trump started speaking in London.

Trump mentioned that a trade deal with China has ‘no deadline’ and could even come after the US election next year and that set off a wave of risk aversion across markets.

USD/JPY slipped from 109.10 to 108.81 as bond yields also fell across the curve. US futures erased gains to fall as much as ~0.4% before finding a bottom for the time being.

That said, the risk mood remains more glum than when we started the session and it’s more of a case that traders are seeing things from a perspective that the glass is now half empty rather than the glass being half full earlier today.

As such, AUD/USD eased up on gains falling from 0.6862 to 0.6840 levels with NZD/USD also scaling back a bit from 0.6533 to 0.6510 levels.

The pound though continues to stay perky amid some mild softness in the dollar with cable threatening a break of the 1.3000 handle. A UK opinion poll continues to favour the Tories ahead of next week’s vote and that isn’t hurting sentiment whatsoever either.

Looking ahead, it’s still largely about the risk mood as markets will have to digest Trump’s comments and how that will factor into overall trade negotiations as well as the implications for the US economy going into next year.

Other than that, I would say be wary of cable running stops above 1.3000-10 as buyers continue to look poised in chasing an upside break.

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European major indices close the day mostly lower

Yields are mixed 

The major European stock indices are closing the day mostly lower. The provisional closes are showing:

  • German DAX, -0.32%
  • France’s CAC, -0.11%
  • UK’s FTSE 100, -0.67%
  • Spain’s Ibex, -0.17%
  • Italy’s FTSE MIB, -0.41%

A look at the benchmark 10 year yields is showing a mixed picture with Germany France and UK yields moving lower, while the more risky Spain Italy and Portugal moving higher.

Yields are mixed 

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European equities softer at the open to start the week

The risk mood continues to stay on the defensive today

  • Eurostoxx -0.3%
  • Germany DAX -0.3%
  • France CAC 40 -0.3%
  • UK FTSE -0.4%
  • Italy MIB -0.3%

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This keeps in tune with US futures, which are down by ~0.4% in trading at the moment. Conflicting signals surrounding US-China trade talks and the civil unrest in Hong Kong is leading to the softer risk tones so far today.

In the currencies space, little has changed since Asia Pacific trading, with the yen still holding slightly firmer – USD/JPY at 108.98 – alongside mild gains in the pound and kiwi.

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European pre-market: Dollar stays softer as focus turns to payrolls

The dollar is on the back foot once again today

WCRS 01-11
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The dollar is weaker across the board as markets continue to keep up the post-FOMC flows ahead of the weekend. Notably, the kiwi is leading gains but NZD/USD continues to rest just above 0.6400 after a bit of a shaky performance yesterday.

The risk mood got a bit of a setback overnight following some US-China trade pessimism, but things are looking more steady for the time being.

USD/JPY continues to hug the 108.00 handle after the yen surged higher in trading yesterday, with price action likely to stay supported near the figure level ahead of the US non-farm payrolls release later in the day.

Option expiries will also be a key factor to watch out for today as they may limit price action during the session ahead. Large chunks are seen in EUR/USD between 1.1150 and 1.1200, GBP/USD at 1.2950, and AUD/USD at the 0.6900 level.

Looking ahead, the market focus should switch towards the jobs data as the next clue for dollar flows. At the same time, be wary of more trade headlines that could potentially affect the risk mood during the day.

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IMF Says Greece Needs More Fiscal Space From European Partners

(Bloomberg) — A reduction of Greece’s fiscal targets would support the country’s economic and social recovery, the International Monetary Fund said.

In 2020, the IMF recommends that “the government and European partners build consensus around a lower primary balance path, given ample economic slack and critical unmet social spending and investment needs,” according to the fund’s statement after the conclusion of its Article IV mission in Athens.

Greece has to achieve a primary surplus of 3.5% of gross domestic output every year until 2022 under the terms of a deal with its European creditors. The new Prime Minister, Kyriakos Mitsotakis, who took over in July, has called these targets “a relic of the past,” and he is now trying to convince his country’s partners to reduce them, starting in 2021.

For 2019, Greece is going to meet its primary surplus target “more or less,” Peter Dolman, IMF mission chief for Greece told reporters in Athens on Friday. But there is a gap for 2020, and the question is what the quality of the measures taken to fill this gap will be, he said.

Cutting public investments is not a quality measure and the country should improve its sales-tax compliance and broaden its tax base to create more fiscal space for social policies and tax cuts, Dolman said.

The fund forecasts that Greece’s growth rate for both 2019 and 2020 will be around 2%. It “will take another decade and a half for real per capita incomes to reach pre-crisis levels,” the IMF said in the statement.

To support growth, the new government “should use its political mandate and improving investor sentiment to deploy a full range of policy tools and overcome long-standing vested interests,” it said.

Fixing banks must be a top priority for the new government given that they are a misfiring engine. Apart from the implementation of an Italian-style project to massively cut bad loans, which is about to be approved by European authorities, the government should take further actions to make judicial processes more efficient and improve insolvency law, according to the IMF.

While Mitsotakis’s administration “deserves credit for unblocking privatization and pushing through business deregulation and digitalization,” much of the needed structural transformation of the Greek economy still lies ahead, the IMF said.

The IMF expects Greece’s public debt-to-GDP ratio to decline over the next decade with relatively low liquidity risks in the medium term also noting that the country has a large cash buffer to use if needed. But, in terms of debt sustainability analysis “we think the long-term sustainability is not assured,” Dolman said.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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European shares end the day higher, but the week is mostly lower

The UK FTSE is up on the week.

The European shares ending the day higher with the UK FTSE leading the way to the upside.  It rose 1.02% on the day. The German Dax was up 0.75%. France’s CAC and Italy’s FTSE MIB lagged. 

The UK FTSE is up on the week.

For the week, the major indices were mostly lower, however, with the excetption being thie UK FTSE which rose by 1.11%.  Spain’s Ibex was unchanged.

Below is a summary of the week moves (the US markets are obviously stilll open and moving).  The worst performer in Europe was the Portugal PSI20 which fell -1.64%. The German Dax fell -0.70% and France’s CAC fell -0.88%. US shares are also lower for the week with the Nasdaq index and small caps Russell 2000 down the most. 

  The weekly changes of the major EU and NA stock indices

The 

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Risk-on ahead of European markets open

The aussie and kiwi lead the way in the currencies space

WCRS 12-09
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As such, the aussie and kiwi are holding firmer to start the session with the yen lagging on the day as equities and bond yields are higher so far today.

US futures are up by 0.4% and markets are liking the positive headlines so far this week, so expect that to stay the course ahead of the ECB monetary policy decision later today.

Looking ahead, the ECB is the key risk event to watch out for today so the euro will be of key focus to markets in the session ahead.

I would expect risk to stay more upbeat ahead of the ECB before we take stock again on how should markets proceed after the decision and Mario Draghi’s press conference.

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