La Crème de la Crème

- Don’t chase – "European equities have moved in a tight trading range in the last year. Key strategy for investors has been not to chase market up or down."
- Country effect – "Right to ignore country allocation in the 2000s. Sector strategy more important then. European macro divergence driving country alpha higher."
- North vs South – "We have favoured North over South Europe in 2010. Tactical call at start-July neutralized this view. Return to structural bias now."
- Country model – "Our country allocation model (CAM) buys Austria, Finland, Netherlands & Sweden and sells Greece, Portugal, Belgium & Ireland."
- French connection – "France has been one of the worst European performers YTD, in-line with mega-cap underperformance. CAC 40 near 12m lows."
- French drivers – "Poor earnings trends now improving. Market de-rated towards mid-1990s lows (p/b relative), macro headwinds. Happy to buy into weakness."
- French fancies – "Analysts’ preferred stocks: Accor, EADS, GDF Suez, JCDecaux, LVMH, Michelin, St Gobain, Sanofi-Aventis, Soc Generale, Vivendi."
- Bigger Europe – "Report also features views on key European markets in CEEMEA region, eg Russia, Turkey, Poland."


Scary Movie Reloaded

- FI Strategizer: "Next week, the US data calendar will likely reinforce evidence of a softening economy. As the bad news should already be priced in, scope for another sizeable rally looks limited. If anything, after the strong rally, investors may look to take profits. With the economic outlook still weak, we would regard profit-taking as a buy opportunity."
- ECB: "The GDP projection will likely be upped significantly this year but left largely unchanged in 2011, and the picture of tame inflation is likely to be confirmed. On the liquidity front, we expect the ECB to announce more 3M LTROs and leave the full allotment in place at least until 1Q11."
- EU Portfolio Strategy: "Given the bond-friendly newsflow and the attractive carry and roll impulse within the EGB curve, we keep our active duration at +0.5 years. Cross-country, we reduce France and Germany in favor of Belgium and we cut Ireland to zero after the S&P downgrade."
- MM: "Moderate demand at recent ECB auctions suggests that tensions are limited to few players and countries. OIS forwards and Euribor futures rates have dropped dramatically in the last weeks but we do not see strong reasons for a retracement in the near term."
- Supply Corner: "Next week, there are no redemptions in the EMU. EUR 16/20bn of supply from Italy, France and Spain will be scattered along the curve. Italy will sell EUR 4/5bn of the new BTP 3.75 Mar21."
- Inflation: "We see August inflation slowing from 1.7% to 1.6%, with risks tilted to the downside. The move should be fully energy-driven."
- FX Strategizer: "Risk aversion is the name of the game again on FX majors: this should keep demand high for safe-haven units like the JPY, the CHF and, to a lesser extent, the USD."
- FX Special: "Direct actions by central banks in the currency markets are a key theme again in the wake of the sharp JPY and CHF rise. We examine rationales behind FX intervention in a dedicated focus."
- TICS: "Net long-term inflows into the US amounted to a still subdued USD 44bn in June, following USD 35bn in inflows in May. An in-depth analysis of US portfolio flows can be found in our monthly Monitor."
- EUR: "The EUR-USD picture has worsened in recent weeks, but for now this pair may only crumble like a cookie and not drop like a stone. An early test of our 3Q10 target of 1.24 thus seems unlikely next week."
- JPY & CHF: "The near-term outlook for both USD-JPY and EUR-CHF will strongly depend on the response of the BoJ and the SNB, which may prevent a rapid test of new lows towards 80 and 1.27, respectively."
- GBP: "The outlook for sterling has become less bright as well: cable may re-test 1.50 in the near future, while EUR-GBP should further struggle trendless between 0.81-0.83, favoring short strangle there."
- Pacific Rim & CAD: "Both the AUD and the NZD should struggle further between 0.87-0.91 and 0.68-0.72. The CAD may get some help from another USD fall or on signals that the BoC will hike rates again."
- Nordics: "A new 25bp rate hike to 0.75% by the Riksbank next Thursday should not be taken as a given, as markets consensus suggests: a no move, as we expect, may thus frustrate NOK-SEK bears much further."

Unicredit Curves & Crosses 20100827

What if the US double dips?

- Global: What if the US double dips? "While an outright recession seems unlikely, the US appears to be sliding toward a “growth recession.” We think the global economy is more resilient to shocks from the US, but decoupling is unlikely."
- United States: One is the loneliest number "With two-consecutive quarters with a one-handle, the US is dangerously close to a “growth recession.” Structural unemployment has increased but most of the rise in unemployment is cyclical."
- Canada: Bank's rule to rule "The Bank’s own policy rule suggests rates are at emergency levels, ie, too low, and at least one more 25bp hike is in the cards in September."
- Euro area: Germany’s interlinked recovery "Growth remains heavily export oriented – slower growth elsewhere in the global economy could have a notable impact on Germany, and in turn many other Eurozone economies."
- UK: The unwinding (or not) of imbalances "Some of the imbalances in the UK economy have ameliorated in recent quarters. But in part, that has come at the cost of exacerbating others."
- Japan: Strong yen starts to take visible toll "Yen appreciation has started to constrain exports in value terms through falling prices, as evident in the steep drop in export prices to the EU."
- Australia: Take me to your leaders "Take me to your leaders. No, not Abbott and Gillard trying to put together a minority government, but wilting leading economic index."
- Emerging Asia: India’s BoP "India’s balance of payments risks are overdone, in our opinion. To us, a la August 2006 and October 2008, apocalyptic concerns about the current account deficit appear to be a bundle of internal contradictions."
- Emerging EMEA: EEMEA rates about to turn? "Are EEMEA rates about to turn? We don’t think so. We also show that in previous cycles rates only started to rise 50-100D before the first rate hike."
- Latin America: What’s going on with domestic demand? "During past Mexico ecessions, recovery dynamics have been pretty similar: initially led by external demand through the rebound of the manufacturing sector, and then gradually spreading to other large sectors of the economy."

Merrill Lynch Global Economic Weekly 20100827

Ireland – What Now?

- "Ireland’s recent widening has been a function of both lower German yields and higher Irish yields."
- "According to our estimates, €13bn of Irish government guaranteed bank debt expires in September - and over half of this on just two days. Any difficulties that the banks have in rolling over debt could further damage market sentiment."
- "Although Ireland’s significant prefunding has reduced its vulnerability, this is unlikely to be sufficient to reverse sentiment and counteract positioning. Spreads will retighten only once buyers outweigh sellers. Short term that seems unlikely."
- "We are not confident that this is the turning point for Irish spreads. The momentum is for further widening, especially in thin summer markets and with trapped longs overhanging the market. In the absence of any substantive positive news, the risk is that spreads go even wider before they tighten a little."
- "The immediate potential danger is that the news feeds on itself and we see another peripheral spiral. The widening could easily spread in the current mood."


Australia: Political uncertainty, economic dynamism

- "The general elections held on Saturday 21 August have resulted in a hung parliament for the first time in seven decades."
- "In the coming weeks, both Labour and the Liberal-National coalition will try to woo the independent members of parliament. If both parties fail to form a stable government, new elections are likely to be held."
- "The economic prospects of the country look good. We expect the economy to grow by over 3% in the coming years, mainly due to the dynamism of the Asian emerging economies."


JPY longs remain in place despite intervention risks

- "The latest IMM data covers the week from 17 to 24 August."
- Still modest positioning risk in EUR/USD: "With risky assets under pressure from weakening US and Asian economic data, non-commercial investors have added to short EUR positions. However, at 9% of open interest, short positioning is still far from the crowded levels seen during the spring Euroland debt ‘crisis’. Hence, positioning risks are probably still limited in EUR/USD, as also indicated by the fact that the 1M risk reversal (a measure of how the option market prices downside EUR/USD risks compared with upside risks) is currently trading at a modest -1.70 compared with its June -3.14 peak."
- Non-commercial investors reduce long CAD exposure: "The Canadian dollar has been under pressure from not only reduced risk appetite, but also weaker-thanexpected economic data. The weaker growth outlook has led the market to price out expected rate hikes in Canada – from pricing more than 100bp on the 12M horizon in late July to just 41bp – and sent USD/CAD back to recent highs above 1.05. Unwinding of speculative positioning has probably added to the upside pressure in USD/CAD as net long CAD positions have been reduced from 31% to 17% of open interest."
- JPY longs remain in place despite intervention risks: "Today’s policy response from the Bank of Japan (scaling up QE) did not come as a surprise to the market and yet non-commercial investors had kept long JPY positions at a high 36% of open interest going into last week. Even as JPY longs are likely to have been reduced following Friday’s price action, and today’s policy announcement, a potential unwinding of long JPY positions could still help the BoJ reduce downside pressures on USD/JPY should further policy action be taken."

DenDanske IMM Positioning 20100830

What is the best financial investment strategy if we are heading towards a deflationary environment with solid profitability?

- "Increasingly, it seems that the economic environment in the United States and the euro zone will:
• be of a deflationary nature (sluggish growth, low inflation, deleveraging, wealth losses, high savings);
• also be characterised by solid corporate profitability due to the distortion of income sharing."
- "In this environment:
• yields on risk-free bonds and swap rates will be low;
• the performance of equities may be negatively affected by the sluggishness of growth;
• hedging against inflation risk is useless, unless the investment horizon is very long;
• companies' financial situation is becoming good, which will make the investment grade credit market attractive."

Natixis Flash Economics 408 20100824

GBP: selective gains targeted on AUD, CAD underperformance

- "Selling rallies in pro-risk and carry trade strategies is favoured in G10 currency markets and should translate into steady demand for safe haven harbours. We look ahead to next Tuesday when Japanese PM Kan will announce a plan to support the economy and tackle the JPY. With the SNB not explicitly targeting a level for the CHF, we wonder if safe haven dynamics may turn even more overwhelming in favour of long CHF positions. Next week also features US non-farm payrolls and the G7 meeting, promising a lively run in to September. If the relentless deterioration in the US economy observed this month is echoed in Friday’s non-farm payrolls, then a precipitous sell-off in risk and AUD, CAD and NOK could follow. For EUR/GBP to progress towards the June lows, we look for resilience in the UK August PMIs and the ECB to extend unlimited liquidity operations until year-end."
- "Minor losses in the G10 were recorded early on but then reversed late on Friday for the CAD, NOK and AUD as risk aversion stalled and equities bounced. GBP lost ground as a result late on to close lower vs a selection of high yielders and commodities. GBP/CAD firmed over 1.64 to close 0.7% higher. GBP/AUD dropped 0.5% to 1.7285, and GBP/NOK gained 0.3%. With risk assets still in a tight spot and worries over a US economic slowdown multiplying, profit taking on rallies in high yield and commodity currencies is still favoured. USD/JPY ran into support in the 0.84 on comments by PM Kan. A 4bp widening in the 10y UST/JGB spread lifted the pair briefly over 85.0. EUR/JPY dived to a 105.44 low before veering up into the close above 108.0."
- "An upward revision to UK Q2 GDP to 1.2% q/q from 1.1% q/y along with a further surprise improvement in the CBI distributive trades survey in August underlined the ongoing resilience of the UK economy. This is in contrast to the US where a new salve of very weak data releases highlighted the increasingly fraught backdrop and danger of a further stalling in US activity in the second half of the year. Q2 GDP was revised down to 1.6% annualised. This puts the Fed closer to deploying additional stimulus at the September FOMC meeting to stave off a double-dip recession. Euro zone data in contrast to the US continues to paint a story of ongoing expansion in the core member states, with Germany and France reporting impressive business confidence and labour market data."
- "UK yields rose on a short squeeze in Treasuries on Friday but plumbed new lows earlier in the week. 5y swaps fell below 2% and 10y gilt yields dropped to an all-time low of 2.839%. The 2y/10y swaps curve flattened below 170bp, with 2y/10y gilts nearing 220bp on solid long end demand. The week ahead promises to be extremely lively as it coincides with the releases of the August PMIs and US non-farm payrolls set to dictate flows. The 10y swap spread widened to +9bp. The 3mth libor/Ois spread was unchanged at 23bp."

LLoydsTSB FX Strategy Weekly 20100827

Does it make sense to invest in yen?

- "The sharp rise in the yen since the spring of 2010 is due to the fact that investors have returned to yen-denominated bonds and notes; this has been the case for the People's Bank of China in particular."
- "This strategy is probably linked to (legitimate) concerns about the US economy, but does it make sense?"
- "While Japan posted vigorous growth at the beginning of 2010 due to its integration in the Asian economy, we should not forget:
• the fundamental anomaly of the Japanese growth model: the continuous distortion of income sharing at the expense of wage earners weakens household demand to generate useless profits that are not being invested;
• the financing of the huge Japanese public debt, accumulated because of the sluggishness of household demand, is only possible as long as there are excess domestic savings and domestic investors accept extremely low returns. Population ageing could in the future trigger a changeover to a situation of external deficit, a sharp rise in interest rates, a fall in the yen and a financial crisis."
- "In a medium-term perspective, we therefore believe it is extremely risky to invest in Japanese public debt."

Natixis Flash Economics 407 20100824