Challenging navigation to calmer waters

- FI Strategizer: "Yields at all-time lows make risk/reward for AAA govies unfavorable. Fiscal tightening in the EMU, lower demand for ECB liquidity and stress tests results should lead to moderately higher yields in core countries. The key risk is a significant loss of growth momentum."
- Macroeconomic focus: "In 3Q10 the debate on the possibility of a renewed recession will heat up. However we believe that the slowdown in EMU growth appears in line with standard business cycles and fiscal tightening should be manageable given currency depreciation. We see odds for a double dip recession in the eurozone at around 10%."
- EU Portfolio Strategy: "During 3Q10, the country allocation should be of exceptional importance again. After 2Q10 widening we are moderately constructive on periphery. We keep the duration slightly long."
- Money Market: "Recent ECB refinancing operations suggest MM tensions are not extreme. The reduction in maturity of ECB liquidity should increase volatility of MM rates. The end of September will be a critical date: about EUR 90bn of 6M and 12M liquidity will mature and, barring new announcements, the ECB will hold its last 3M LTRO."
- Inflation: "ILBs have underperformed nominal bonds YTD. Inflation will remain moderate in 3Q10 and so will inflation expectations. However, as the EMU 10Y BE trades at a very cheap level, we see a good buying opportunity. On the contrary, US and UK BE do not look attractive."
- Supply Corner: "3Q10 will be the most liquid quarter of the year in the EMU, with EUR 175bn of redemptions and EUR 60bn of coupons. We expect EUR 195bn of gross supply (EUR 20bn net), with risks on the upside. Even so, net supply should be much lower than in 1Q and 2Q10."
- FX Strategizer: "Swings between risk appetite and risk aversion will keep trading jerky on FX majors. Yet, CHF and JPY should outperform again."
- EUR: "EUR-USD may approach the 1.28-1.30 area in the very near term, but the global risk picture and creeping EMU budget fears still favor a weaker EUR-USD back towards 1.24-1.22 after the summer."
- JPY: "As the JPY will stay sensitive to persisting global uncertainty, EUR-JPY should also remain skewed to the downside and would hardly develop significant correction potential beyond 113 in the rest of 3Q10."
- CHF: "The recent EUR-CHF bounce appears far from convincing and we still consider a temporary test below 1.30 as a very likely scenario."
- GBP: "The bold UK emergency budget should keep sterling firm: cable should head towards 1.60, while EUR-GBP should still break below 0.80."
- Commodity Currencies: "Trading should stay choppy on AUD, NZD and CAD, reflecting global risks and a tighter monetary policy at home."
- Nordics: "Market uncertainty and prudence on rates at home will make a further EUR-SEK and EUR-NOK drop bumpier."
- FX Special: "China’s decision to allow the yuan greater flexibility should not be overstated. We doubt USD-CNY will fall well below 6.70 by 4Q10."
Unicredit Curves & Crosses 20100709

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