- Macro viewpoint: Recession? Probably not "We explore a number of potential indicators of a future downturn by estimating a series of recession probability models. These catalog the ability of one or more indicators to accurately signal recessions in the past, and then ask what chance of a near-term recession they predict today. These simple and oft-used models can help to identify not only how strongly some indicators point toward a possible double dip, but also which suffer from limited accuracy or false positives."
- Fed watch: Fade the hawks … still "One recurring theme over the past year has been the outsized voice of the more hawkish FOMC members relative to their voting clout. This week was no exception, with three different members – but only one voter – expressing their displeasure with some aspect of current or prospective Fed policy. So, let us repeat a core message once again: fade the hawks on the FOMC."
- The week ahead: Core retail sales up; inflation subdued "Next week brings with it the inflation trifecta: import prices, producer prices, and consumer prices. Of those three measures we give the most weight to consumer prices and we are expecting goose-eggs on the headline and core measures. On Wednesday, retail sales data are released for June. While we expect a negative print on the headline, the core retail control measure, which provides us with a better sense of the trend in consumer spending, is expected to post a respectable 0.3% MoM gain."
Merrill Lynch US Economic Weekly 20100709
US Rate & MBS Strategy
- "Stay Short Duration: We expect 10yr yields to climb back towards 3.25%."
- "Strong TIPS Auction: The 10yr TIPS auction was exceptionally strong this week despite rising TIPS issuance and real yields near recent lows. This bodes well for post-auction performance of TIPS."
- "Long-Vol Should Rise Due to Legislation: Supply shock in long-dated vol stemming from legislation could total 20mm bp-vega, and be worth 20- 25bp/annum gradually over 5 years."
- "Go Up-In-Coupon in Agency MBS: With the Fed’s coupon swap program effectively done, high coupons look attractive based on carry, convexity, and supply shifts."
- "Agency Debt: Callable redemptions have been extremely high, and we expect this to continue with 83% of eligible callables to be redeemed in the base case."
- "US Rate Strategy Model Portfolio: The portfolio is currently up 0.5% month-todate."
Citigroup US Rate MBS Strategy Weekly 20100709
- "Strong TIPS Auction: The 10yr TIPS auction was exceptionally strong this week despite rising TIPS issuance and real yields near recent lows. This bodes well for post-auction performance of TIPS."
- "Long-Vol Should Rise Due to Legislation: Supply shock in long-dated vol stemming from legislation could total 20mm bp-vega, and be worth 20- 25bp/annum gradually over 5 years."
- "Go Up-In-Coupon in Agency MBS: With the Fed’s coupon swap program effectively done, high coupons look attractive based on carry, convexity, and supply shifts."
- "Agency Debt: Callable redemptions have been extremely high, and we expect this to continue with 83% of eligible callables to be redeemed in the base case."
- "US Rate Strategy Model Portfolio: The portfolio is currently up 0.5% month-todate."
Citigroup US Rate MBS Strategy Weekly 20100709
The risk of "wasting savings" is even greater than before the crisis
- "We use the term "waste of savings" for a situation where countries’ savings are not used to finance useful investments that could generate long-term growth."
- "In fact:
• in Europe, before the crisis, savings financed productive investment and (unfortunately in certain cases) housing investment; in the wake of the crisis, they have financed fiscal deficits;
• in Japan, savings continue to finance the fiscal deficit;
• in the United States, the shortfall in savings (total and household) remains significant;
• prior to the crisis, the excess savings in emerging and oil-exporting countries financed the US and also the UK external deficits, i.e. to a large extent the household borrowing requirement. Since the crisis, they have financed these countries’ fiscal deficits, and perhaps households in the United States once more."
- "The share of savings that finances productive investments in OECD countries is therefore even lower after the crisis than before."
Natixis Flash Economics 344 20100702
- "In fact:
• in Europe, before the crisis, savings financed productive investment and (unfortunately in certain cases) housing investment; in the wake of the crisis, they have financed fiscal deficits;
• in Japan, savings continue to finance the fiscal deficit;
• in the United States, the shortfall in savings (total and household) remains significant;
• prior to the crisis, the excess savings in emerging and oil-exporting countries financed the US and also the UK external deficits, i.e. to a large extent the household borrowing requirement. Since the crisis, they have financed these countries’ fiscal deficits, and perhaps households in the United States once more."
- "The share of savings that finances productive investments in OECD countries is therefore even lower after the crisis than before."
Natixis Flash Economics 344 20100702
EM Recommendations
- "So far, the emerging markets have done very well in 2010. The benchmarks for both hard- (EMBI) and local- (GBI) currency bonds posted positive returns; EMBI and GBI posted returns of 5.56% and 18.83%, respectively, for the first six months of 2010. We are still positive about the asset class, although we do not expect the second half of the year to proceed at the same pace as the first half. We admit that the ongoing turmoil in relation to the debt problems of the euro zone constitutes a risk, particularly for the Eastern European countries. The public debt and budget deficits of the emerging-market countries are generally much lower. Therefore the emerging-market countries are not nearly as vulnerable as the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). For the short term, however, there is a risk that Eastern Europe underperforms the other emergingmarket regions. Read more here. Provided that the cooperation between Greece and the EU/the IMF proceeds successfully, we see no reason to reduce exposure to emerging-market bonds. However, investors who overweight Central and Eastern Europe may consider reducing their exposure to the benefit of other emergingmarket regions. Investors should also take into consideration the mounting concern over global growth, the possibility of further intervention in the market (such as the 2 % tax in Brazil and Colombia’s sale of pesos), and the exit strategies from the very relaxed fiscal- and monetary policies pursued around the globe. This publication gives you an overview of our recommendations for local-currency bonds."
JyskeBank EM Recommendations 20100708
JyskeBank EM Recommendations 20100708
The spectre of structural unemployment
- "The week has been dominated by discussions of European banking-sector stress tests and
the publication of the results on July 23. We now know that 91 banks will be in the spotlight, but we have little detail on the underlying test assumptions and, in particular, on the simulated shocks to sovereign bond portfolios. Today’s ECB press conference provided little further
information, despite a battery of stress-testrelated questions. On other matters, the ECB
appears to believe that money market tensions have, if anything, eased, and is not particularly concerned (rightly so, in our view) about the market-led liquidity withdrawal witnessed in July, or the rate implications thereof. The ECB also expressed a neutral view on the strength of
the recovery."
- "For the recovery to become sustainable, labour markets need to stabilise so that consumer confidence can be restored. This week we discuss the cyclical versus structural aspects of the unemployment picture. While it looks as if employment contraction has stabilised, the divergence in unemployment rates across European economies is now at historical highs. In some countries, short-term working-time arrangements have shifted the labour market
adjustment away from job cuts towards more flexible hours worked. Heterogeneous
macroeconomic exposures to harder-hit sectors such as construction and industry have also played a role. We find that there is a non-negligible risk that hard-hit countries such as Spain and Ireland are heading towards an increase in structural—as opposed to merely cyclical—unemployment. However, the Euro-zone as a whole seems to be shielded from an acute and persistent skills mismatch."
GoldmanSachs European Weekly Analyst 20100708
the publication of the results on July 23. We now know that 91 banks will be in the spotlight, but we have little detail on the underlying test assumptions and, in particular, on the simulated shocks to sovereign bond portfolios. Today’s ECB press conference provided little further
information, despite a battery of stress-testrelated questions. On other matters, the ECB
appears to believe that money market tensions have, if anything, eased, and is not particularly concerned (rightly so, in our view) about the market-led liquidity withdrawal witnessed in July, or the rate implications thereof. The ECB also expressed a neutral view on the strength of
the recovery."
- "For the recovery to become sustainable, labour markets need to stabilise so that consumer confidence can be restored. This week we discuss the cyclical versus structural aspects of the unemployment picture. While it looks as if employment contraction has stabilised, the divergence in unemployment rates across European economies is now at historical highs. In some countries, short-term working-time arrangements have shifted the labour market
adjustment away from job cuts towards more flexible hours worked. Heterogeneous
macroeconomic exposures to harder-hit sectors such as construction and industry have also played a role. We find that there is a non-negligible risk that hard-hit countries such as Spain and Ireland are heading towards an increase in structural—as opposed to merely cyclical—unemployment. However, the Euro-zone as a whole seems to be shielded from an acute and persistent skills mismatch."
GoldmanSachs European Weekly Analyst 20100708
Reading Macro Themes from Equity Markets
- "As the second half of 2010 unfolds and we survey the uncertain macroeconomic outlook
ahead, it is especially important to listen closely to the macro messages from financial markets. The macro outlook that is implicitly priced by various asset markets is an
important input into our macro and market views, and helps us to better understand the
tactical macro landscape."
- "Fixed income and FX markets have traditionally been most comfortable with this type of macro conversation. But we have found that the equity market—although less straightforwardly macro—has a potentially rich set of information that can be mined for
its macro content. Over the last several years, aided by our Wavefront models, we have
developed a ‘vocabulary’ around the equity market and its pricing of macro risks."
- "We are also launching today the International Macro Equity Monitor (IMEM), a short weekly publication presenting metrics based on our suite of Wavefront models, which aims to explain the interplay between macroeconomic forces and equity market dynamics both at the industry level within the US equity market and globally across a wide range of country-level
indices."
- "Turning to the current state of affairs, as the Global Markets group has discussed recently,
the most salient and emerging feature of the macro landscape has been the turn in the global cycle, as accelerating growth has given way to a bit of a slowdown. Cyclical equities in the US and Europe have reflected this as equity market growth views have been downgraded sharply. Given this, it is striking that global growth views in the equity market are more resilient, and (outside of China) EM outperformance is a re-emerging theme."
GoldmanSachs Global Economics Weekly 20100707
ahead, it is especially important to listen closely to the macro messages from financial markets. The macro outlook that is implicitly priced by various asset markets is an
important input into our macro and market views, and helps us to better understand the
tactical macro landscape."
- "Fixed income and FX markets have traditionally been most comfortable with this type of macro conversation. But we have found that the equity market—although less straightforwardly macro—has a potentially rich set of information that can be mined for
its macro content. Over the last several years, aided by our Wavefront models, we have
developed a ‘vocabulary’ around the equity market and its pricing of macro risks."
- "We are also launching today the International Macro Equity Monitor (IMEM), a short weekly publication presenting metrics based on our suite of Wavefront models, which aims to explain the interplay between macroeconomic forces and equity market dynamics both at the industry level within the US equity market and globally across a wide range of country-level
indices."
- "Turning to the current state of affairs, as the Global Markets group has discussed recently,
the most salient and emerging feature of the macro landscape has been the turn in the global cycle, as accelerating growth has given way to a bit of a slowdown. Cyclical equities in the US and Europe have reflected this as equity market growth views have been downgraded sharply. Given this, it is striking that global growth views in the equity market are more resilient, and (outside of China) EM outperformance is a re-emerging theme."
GoldmanSachs Global Economics Weekly 20100707
Housing Falters after the Tax Credit Expires
- "The reduced supply of new homes for sale is one of the steps necessary to bring the market into balance."
- "With distressed sales likely counting for a larger proportion of home sales during the second half of this year, we will likely see some renewed pressure on home prices."
Wells Fargo Special Commentary 20100709
- "With distressed sales likely counting for a larger proportion of home sales during the second half of this year, we will likely see some renewed pressure on home prices."
Wells Fargo Special Commentary 20100709
Global: Growth is bound to slow - but by how much?
- "Growth is bound to slow down in the second half of 2010, as the balance between tailwinds and headwinds turns less favourable."
- "The key question though is how much will growth slow. We still don’t expect growth to go below potential growth over the coming quarters, but a pick-up in employment soon and no new setbacks in financial markets are key assumptions behind this forecast."
- "Should current headwinds get stronger we will have to re-evaluate our outlook."
DenDanske Research 20100709
- "The key question though is how much will growth slow. We still don’t expect growth to go below potential growth over the coming quarters, but a pick-up in employment soon and no new setbacks in financial markets are key assumptions behind this forecast."
- "Should current headwinds get stronger we will have to re-evaluate our outlook."
DenDanske Research 20100709
Not facing a double dip
- Reversal. "Sentiment has turned. While confidence had still dominated until recently, growth concerns are now spreading. The catalyst was poor US economic numbers combined with the expected retarding effects of the European-wide austerity policy measures. Some economists even expect the economy to slide back into recession."
- Assessment. "Just as we did not share the previous euphoria, we do not subscribe to the fears of the double-dip scenario. True, the leading indicators around the globe are heading south, while the impulses from the inventory cycle and the national fiscal spending programs are expiring and will soon become a drag. The pace of growth will therefore moderate, but
probably nothing more than that."
- US. "The worst recession since WW II in the aftermath of the Lehman collapse alone argues against a double-dip recession. Employment and fixed capital investment fell so low that a renewed, sustained contraction is scarcely possible. Furthermore, the administration is making the economy its top priority as it faces mid-term congressional elections in November.
GDP growth should not fall below an annual rate of 2%."
- Europe. "EMU-wide austerity measures will shave 0.6-0.7 of a percentage point off GDP growth in 2011. This, however, will be matched by the positive impulses from this year's EUR depreciation. Nevertheless, economic growth should moderate over the next few quarters to an annual rate of 1%-1¼%. The pendulum is swinging back even more pronounced in Germany. This is suggested by the new orders-to-stock ratio, one of the best global leading indicators. But as in the US, the downside risks in Europe cannot be ignored."
Unicredit Friday Notes 20100709
- Assessment. "Just as we did not share the previous euphoria, we do not subscribe to the fears of the double-dip scenario. True, the leading indicators around the globe are heading south, while the impulses from the inventory cycle and the national fiscal spending programs are expiring and will soon become a drag. The pace of growth will therefore moderate, but
probably nothing more than that."
- US. "The worst recession since WW II in the aftermath of the Lehman collapse alone argues against a double-dip recession. Employment and fixed capital investment fell so low that a renewed, sustained contraction is scarcely possible. Furthermore, the administration is making the economy its top priority as it faces mid-term congressional elections in November.
GDP growth should not fall below an annual rate of 2%."
- Europe. "EMU-wide austerity measures will shave 0.6-0.7 of a percentage point off GDP growth in 2011. This, however, will be matched by the positive impulses from this year's EUR depreciation. Nevertheless, economic growth should moderate over the next few quarters to an annual rate of 1%-1¼%. The pendulum is swinging back even more pronounced in Germany. This is suggested by the new orders-to-stock ratio, one of the best global leading indicators. But as in the US, the downside risks in Europe cannot be ignored."
Unicredit Friday Notes 20100709
Brazilian presidential elections - What should we expect?
- "Brazil has come a very long way since the 2002 presidential elections that almost pushed the country into default. This year’s presidential elections will be contested by two candidates with broadly similar views of how to manage the economy, making the elections a relative non-event – at least from a short-term market point of view. If the next government succeeds in implementing a medium-term fiscal adjustment (a big “if”), there is no reason why Brazil won’t be able to achieve 6% growth. This might go some way in silencing some of the critics who believe that Brazil does not belong in the BRICs."
DeutscheBank Talking Point 20100709
DeutscheBank Talking Point 20100709
Positioning risk on EUR/USD eases
- "The latest IMM data cover the week from 29 June to 6 July."
- "During the week covered by the latest IMM positioning data, USD has weakened more than 2% in effective terms, with EUR/USD breaking well above 1.26 in summer-thin trading and with USD/JPY dropping below 87. The broad-based USD weakening has coincided with speculative investors trimming their net long USD positions, primarily by paring short EUR positions. While speculative market participants remain short EUR, positioning is now less extreme than previously and directional risk from a position squeeze arguably less one-sided."
- "Speculative investors have continued to add to their long JPY positions. With net longs
approaching 30% of open interest, upside risks in USD/JPY are emanating from the significant JPY long positions."
- "The commodity currencies suffered during the time period covered by the IMM data as risk appetite was under pressure, causing speculative investors to scale back long positions in AUD and CAD. However, since then, market sentiment has improved and both AUD and CAD have received support from exceptionally strong employment reports. With money markets pricing in more future rate hikes from the RBA and the BoC, speculative investor interest in AUD and CAD looks bound to resume."
DenDanske IMM Positioning 20100712
- "During the week covered by the latest IMM positioning data, USD has weakened more than 2% in effective terms, with EUR/USD breaking well above 1.26 in summer-thin trading and with USD/JPY dropping below 87. The broad-based USD weakening has coincided with speculative investors trimming their net long USD positions, primarily by paring short EUR positions. While speculative market participants remain short EUR, positioning is now less extreme than previously and directional risk from a position squeeze arguably less one-sided."
- "Speculative investors have continued to add to their long JPY positions. With net longs
approaching 30% of open interest, upside risks in USD/JPY are emanating from the significant JPY long positions."
- "The commodity currencies suffered during the time period covered by the IMM data as risk appetite was under pressure, causing speculative investors to scale back long positions in AUD and CAD. However, since then, market sentiment has improved and both AUD and CAD have received support from exceptionally strong employment reports. With money markets pricing in more future rate hikes from the RBA and the BoC, speculative investor interest in AUD and CAD looks bound to resume."
DenDanske IMM Positioning 20100712
Gas glut reaches Europe
- "A gas glut is heralding the dawn of a new era. This new era is marked by technological progress, greater convergence between global gas markets and the declining relevance of established pricing patterns in the continental European pipeline business. The areas concerned are the typical large-scale projects, the international supply relationships and the downstream trading and usage levels."
- "The free-market price of gas will become the new benchmark and will be the guide for the price of pipeline gas. We expect a pronounced buyers‟ market to develop in the European gas sector by 2013, with North America dictating the price trend. Following the end of the low-price phase from around 2014 onwards we do not expect to see a renaissance of the longstanding link with the oil price."
- "The gas glut is bringing opportunities for domestic customers to benefit from pricing changes and providing greater flexibility for industrial users. Traditional municipal utilities and regional energy suppliers are coming under pressure. By contrast, major opportunities are opening up for independent distributors, independent traders and newcomers. Power plant operators should review their procurement strategies. New challenges face gas producers and importers; they will not be in the same boat for much longer, as they will be competing against one another for tighter margins in future."
- "The security of supply in Europe is improving. The battle for unconventional gas deposits is in full swing. New pipelines and gas storage facilities currently appear to be less urgent. Nevertheless, there is a need to press ahead with the projects in the longer-term interest. Gas market liberalisation, the basis for the new competitive situation, must not under any circumstances be allowed to stagnate. The “Gas OPEC” is currently toothless, but its time will come. Europe should therefore invest in more open structures, globally diversified sources and new technologies – and also trust in the creative vigour of market participants."
DeutscheBank EU Monitor 20100708
- "The free-market price of gas will become the new benchmark and will be the guide for the price of pipeline gas. We expect a pronounced buyers‟ market to develop in the European gas sector by 2013, with North America dictating the price trend. Following the end of the low-price phase from around 2014 onwards we do not expect to see a renaissance of the longstanding link with the oil price."
- "The gas glut is bringing opportunities for domestic customers to benefit from pricing changes and providing greater flexibility for industrial users. Traditional municipal utilities and regional energy suppliers are coming under pressure. By contrast, major opportunities are opening up for independent distributors, independent traders and newcomers. Power plant operators should review their procurement strategies. New challenges face gas producers and importers; they will not be in the same boat for much longer, as they will be competing against one another for tighter margins in future."
- "The security of supply in Europe is improving. The battle for unconventional gas deposits is in full swing. New pipelines and gas storage facilities currently appear to be less urgent. Nevertheless, there is a need to press ahead with the projects in the longer-term interest. Gas market liberalisation, the basis for the new competitive situation, must not under any circumstances be allowed to stagnate. The “Gas OPEC” is currently toothless, but its time will come. Europe should therefore invest in more open structures, globally diversified sources and new technologies – and also trust in the creative vigour of market participants."
DeutscheBank EU Monitor 20100708
Readings
Institutions exit the muni market - Felix Salmon
The Crisis & the Euro - New York Review of Books
Consumer Credit in U.S. Declined More Than Forecast - BusinessWeek
Is now the time to experiment with negative interest rates? - FT Economist's Forum
Underfunded Pensions are Red Flag for Investors: Greenberg - CNBC Strategy Session
Biggest Defaulters on Mortgages Are the Rich - New York Times
Unemployment Extension Standoff, Day 37: Mugged By Deficit Hawks - Huffington Post
The Crisis & the Euro - New York Review of Books
Consumer Credit in U.S. Declined More Than Forecast - BusinessWeek
Is now the time to experiment with negative interest rates? - FT Economist's Forum
Underfunded Pensions are Red Flag for Investors: Greenberg - CNBC Strategy Session
Biggest Defaulters on Mortgages Are the Rich - New York Times
Unemployment Extension Standoff, Day 37: Mugged By Deficit Hawks - Huffington Post
Trading Range - For Now
- Long-Term Bullish — "After a 7.2% fall in H1, we expect emerging markets to bounce in the second half of the year. Our forecast is for 20-25% returns for GEMs to the end of 2010, with the best returns being concentrated in Q4."
- Q3 Trading Range — "Several factors, including seasonal trends, suggest that the current trading range will stay in place for some weeks still, with a breakout to a new high for the cycle (12% above current levels) only likely around end-Q3."
- Regions — "We lift EMEA to Neutral, based on better earnings momentum and even lower valuations, and cut Latin America to Underweight, on weaker earnings momentum, low ROEs and rising interest rates. Asia remains an Overweight."
- Countries — "Our top market picks are Russia, Turkey, Korea, Taiwan and Thailand (the latter is upgraded from Neutral). We cut Brazil to Neutral and India to Underweight. We raise South Africa, Poland, Egypt and Malaysia to Neutral. China and Mexico remain Neutrals."
- Sectors — "Our sector views have a slight beta bias, with Overweights in Materials, IT and Industrials. We are Underweight in some classic defensive sectors – Healthcare, Consumer and Telecoms – all of which outperformed in Q2. We are Neutral in Financials and Energy."
- No ‘Double-Dip’ — "Fears of a ‘double-dip’ are overdone, in our view. We expect recovery to continue, albeit unevenly. Emerging markets (at 6.8% forecast GDP growth in 2010) should remain the strongest part of the global recovery story. China may slow to 8% growth by Q4, but this is far from a ‘hard landing.’"
- Downgrade Risk — "However, markets must navigate the peaking-out of GDP and earnings growth forecasts. Despite forecast EPS growth of as high as 37% in emerging markets in 2010, 12-month forward forecasts are now rolling over and our upgrades/downgrades ratio is eroding."
- Liquidity and Valuation Support — "Through this process, equity markets should be supported by ‘lower interest rates for longer’ in many parts of the world and by attractive valuations. GEMs now trade at 10.8x forward earnings (a 9% discount to their long-term average) and cheap to emerging market bonds. Attractive valuations provide leeway for equity markets in the event of earnings downgrades."
Citigroup Global Emerging Markets Strategist 20100708
- Q3 Trading Range — "Several factors, including seasonal trends, suggest that the current trading range will stay in place for some weeks still, with a breakout to a new high for the cycle (12% above current levels) only likely around end-Q3."
- Regions — "We lift EMEA to Neutral, based on better earnings momentum and even lower valuations, and cut Latin America to Underweight, on weaker earnings momentum, low ROEs and rising interest rates. Asia remains an Overweight."
- Countries — "Our top market picks are Russia, Turkey, Korea, Taiwan and Thailand (the latter is upgraded from Neutral). We cut Brazil to Neutral and India to Underweight. We raise South Africa, Poland, Egypt and Malaysia to Neutral. China and Mexico remain Neutrals."
- Sectors — "Our sector views have a slight beta bias, with Overweights in Materials, IT and Industrials. We are Underweight in some classic defensive sectors – Healthcare, Consumer and Telecoms – all of which outperformed in Q2. We are Neutral in Financials and Energy."
- No ‘Double-Dip’ — "Fears of a ‘double-dip’ are overdone, in our view. We expect recovery to continue, albeit unevenly. Emerging markets (at 6.8% forecast GDP growth in 2010) should remain the strongest part of the global recovery story. China may slow to 8% growth by Q4, but this is far from a ‘hard landing.’"
- Downgrade Risk — "However, markets must navigate the peaking-out of GDP and earnings growth forecasts. Despite forecast EPS growth of as high as 37% in emerging markets in 2010, 12-month forward forecasts are now rolling over and our upgrades/downgrades ratio is eroding."
- Liquidity and Valuation Support — "Through this process, equity markets should be supported by ‘lower interest rates for longer’ in many parts of the world and by attractive valuations. GEMs now trade at 10.8x forward earnings (a 9% discount to their long-term average) and cheap to emerging market bonds. Attractive valuations provide leeway for equity markets in the event of earnings downgrades."
Citigroup Global Emerging Markets Strategist 20100708
EMU Haircuts – Just a Trim Please!
- Overview: "While the recent rally has left longer-dated US rates looking rich on our fair value measure, the same is not true for Europe. This lends support to our short US versus Europe view and also suggests that EUR curvature may be too low."
- Euro Rates Strategy: "While the sovereign haircut component of EU bank stress tests remains unclear, there is potential for this to promote further near-term volatility in EMU and Bund ASW spreads. Taking a medium-term perspective, we find current spread levels unattractive for maintaining long Bund ASW positions. Our base case scenario sees 10yr Bund spreads potentially returning to single digits during the second half of this year."
- Sterling Rates Strategy: "We examine the threat to gilts from inflation, explain our preference to position for fiscal progress via swap spreads rather than cross market or outright risk, and argue the case for selling 5yr swap spreads instead of 10years."
- Global Inflation Strategy: "Rising deflation fears and higher issuance are likely to weigh on TIPS break-evens in the coming months. In the euro market, we look at dislocations between 10s30s inflation curves."
- Volatility: "3m2y GBP straddles still look rich, both outright and vs 3m5y. Selling short-dated EUR volatility looks attractive, either versus 3m2y in USD or versus both 1m5y and 1m10y volatility in EUR."
Citigroup International Interest Rate Strategist 20100708
- Euro Rates Strategy: "While the sovereign haircut component of EU bank stress tests remains unclear, there is potential for this to promote further near-term volatility in EMU and Bund ASW spreads. Taking a medium-term perspective, we find current spread levels unattractive for maintaining long Bund ASW positions. Our base case scenario sees 10yr Bund spreads potentially returning to single digits during the second half of this year."
- Sterling Rates Strategy: "We examine the threat to gilts from inflation, explain our preference to position for fiscal progress via swap spreads rather than cross market or outright risk, and argue the case for selling 5yr swap spreads instead of 10years."
- Global Inflation Strategy: "Rising deflation fears and higher issuance are likely to weigh on TIPS break-evens in the coming months. In the euro market, we look at dislocations between 10s30s inflation curves."
- Volatility: "3m2y GBP straddles still look rich, both outright and vs 3m5y. Selling short-dated EUR volatility looks attractive, either versus 3m2y in USD or versus both 1m5y and 1m10y volatility in EUR."
Citigroup International Interest Rate Strategist 20100708
Weekly Focus: Global growth slowing down
- "The US data release calendar is quite full. Most notable of the US figures will be the retail sales report for June."
- "In the euro area, the German ZEW expectations index will get the most attention. The bank stress tests to be published on 23 July will also attract a lot of attention.
- In the UK, the minutes from the 8 July Monetary Policy meeting at the Bank of England will be released on 21 July."
- "In Asia, the main focus next week will be China, where GDP for Q2 is due to be released."
- "In Japan, focus will be on the Upper House election on 11 July."
- "In Sweden, we are particularly looking forward to delving into the apparent tensions within the Riksbank board."
- "This week the IMF adjusted its forecast for global growth upwards for 2010, but at the same time emphasised that downside risks have increased."
- "Data from the US was mixed, but nevertheless helped to reduce concerns about a sharp decline in US growth."
- "In Europe, ECB president Trichet did not seem concerned about the latest increases in money market rates."
- "Global growth to slow – but by how much?"
- "Prospects of a double-dip scenario?"
DenDanske Weekly Focus 20100709
- "In the euro area, the German ZEW expectations index will get the most attention. The bank stress tests to be published on 23 July will also attract a lot of attention.
- In the UK, the minutes from the 8 July Monetary Policy meeting at the Bank of England will be released on 21 July."
- "In Asia, the main focus next week will be China, where GDP for Q2 is due to be released."
- "In Japan, focus will be on the Upper House election on 11 July."
- "In Sweden, we are particularly looking forward to delving into the apparent tensions within the Riksbank board."
- "This week the IMF adjusted its forecast for global growth upwards for 2010, but at the same time emphasised that downside risks have increased."
- "Data from the US was mixed, but nevertheless helped to reduce concerns about a sharp decline in US growth."
- "In Europe, ECB president Trichet did not seem concerned about the latest increases in money market rates."
- "Global growth to slow – but by how much?"
- "Prospects of a double-dip scenario?"
DenDanske Weekly Focus 20100709
EMEA Weekly: Will the summer calm hold?
- Market movers ahead: Inflation across the CEE and Turkish rate decision "Even though Turkish inflation continues to be well-above the Turkish central bank’s (TCMB) official inflation target of 6.5% and the recovery in the Turkish economy appears to be quite robust, the TCMB continues to keep its relatively dovish stance. Hence, the Turkish central bank will keep its wait-and-see stance in monetary policy keeping rates unchanged next week with the key policy rate at 6.5% at its next week’s MPC meeting. Inflation for June is due for release across the CEE region. See page 7, where we take closer look at the inflation outlook in the EMEA region."
- FX Outlook: Will the summer calm hold... likely not "The total score in the Scorecard – adding up the individual score for all of the currencies in the Scorecard – has during this week been the most negative since February 2009 – and it is of course well-known that that indication correctly forecast a major sell-off in the EMEA currencies in Q1 09. Hence, the fact that the overall score is now so negative is a clear signal to us that that investors should take off risk in the EMEA FX markets and we would be looking for some kind of overall correction to hit the EMEA FX markets sooner rather than later. The South African rand remains the lowest scoring currency in the EMEA FX Scorecard. It is notable that the rand not only scores poorly overall, but that all the sub scores look quite weak. Therefore we continue to recommend investors to be short in this currency."
- Scorecard-based trade of the week Buy RON/ZAR "Last week we recommend buying CZK/ZAR based on our EMEA FX Scorecard. That trade is up marginally over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Romanian leu is now the highest scoring currency in the Scorecard. We therefore recommend buying RON/ZAR going into next week."
DenDanske EMEA Weekly 20100709
- FX Outlook: Will the summer calm hold... likely not "The total score in the Scorecard – adding up the individual score for all of the currencies in the Scorecard – has during this week been the most negative since February 2009 – and it is of course well-known that that indication correctly forecast a major sell-off in the EMEA currencies in Q1 09. Hence, the fact that the overall score is now so negative is a clear signal to us that that investors should take off risk in the EMEA FX markets and we would be looking for some kind of overall correction to hit the EMEA FX markets sooner rather than later. The South African rand remains the lowest scoring currency in the EMEA FX Scorecard. It is notable that the rand not only scores poorly overall, but that all the sub scores look quite weak. Therefore we continue to recommend investors to be short in this currency."
- Scorecard-based trade of the week Buy RON/ZAR "Last week we recommend buying CZK/ZAR based on our EMEA FX Scorecard. That trade is up marginally over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Romanian leu is now the highest scoring currency in the Scorecard. We therefore recommend buying RON/ZAR going into next week."
DenDanske EMEA Weekly 20100709
Weekly Credit Update
- "Credit indices have traded tighter during the week"
- "Strong activity in the primary market despite the holiday season"
DenDanske Weekly Credit Update 20100709
- "Strong activity in the primary market despite the holiday season"
DenDanske Weekly Credit Update 20100709
Readings
Austerity is not the only option - Financial Times
An Interesting Ratio - Early Warning
China won't dump U.S. Treasuries or pile into gold - Reuters
To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Wall Street Journal
Reserves and other early warning indicators work in crisis after all - Vox EU
Croatia: On The Brink of What? - Credit Writedowns
On Not Owning a Credit Card - New Deal 2.0
Federal Reserve weighs steps to offset slowdown in economic recovery - WaPo
Lumber - Financial Times
Toxic bank assets haven't gone away yet - CNN Money
The Rising Threat of Deflation - AEI Online
An Interesting Ratio - Early Warning
China won't dump U.S. Treasuries or pile into gold - Reuters
To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Wall Street Journal
Reserves and other early warning indicators work in crisis after all - Vox EU
Croatia: On The Brink of What? - Credit Writedowns
On Not Owning a Credit Card - New Deal 2.0
Federal Reserve weighs steps to offset slowdown in economic recovery - WaPo
Lumber - Financial Times
Toxic bank assets haven't gone away yet - CNN Money
The Rising Threat of Deflation - AEI Online
European Banks: Who's testing who?
- "The Committee of European Banking Supervisors (CEBS) will be publishing its stress tests on July 23. Following on from our indicative stress test note (“Euro zone stress test”, 18 June), we have expanded our analysis to include the Landesbanks and Cajas."
- "The most important point to make is that although it is the banking sector that is formally being tested, the real test is of the official sector itself: Given the amount of information which is available already, it is not reasonable to suppose that the stress test will provide the bank funding market with important news about intrinsic creditworthiness. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion."
- "We assess the total bailout capacity of the European official sector as being potentially as much as €900bn, with €130bn available with reasonable availability and certainty:. We would regard the stress test as a “success” in so far as it demonstrates that the political, legal and administrative structures are available to provide an effective lender of last resort to the euro area banking system. Our best case would be one in which it was demonstrated that the resources of the EFSF were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding. In either case, our favoured stocks would be BNP Paribas and Santander."
CreditSuisse European Banks 20100708
- "The most important point to make is that although it is the banking sector that is formally being tested, the real test is of the official sector itself: Given the amount of information which is available already, it is not reasonable to suppose that the stress test will provide the bank funding market with important news about intrinsic creditworthiness. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion."
- "We assess the total bailout capacity of the European official sector as being potentially as much as €900bn, with €130bn available with reasonable availability and certainty:. We would regard the stress test as a “success” in so far as it demonstrates that the political, legal and administrative structures are available to provide an effective lender of last resort to the euro area banking system. Our best case would be one in which it was demonstrated that the resources of the EFSF were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding. In either case, our favoured stocks would be BNP Paribas and Santander."
CreditSuisse European Banks 20100708
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