MARKET MOVER - BNP PARIBAS - Investment Services India

Spain set to present its
new budget next week
Risks to the eurozone from the periphery also prevail. The Spanish
government is scheduled to present its new budget next week, which should
be a stepping stone on the road to an agreement on financial aid, paving the
way for OMT/ESM bond purchases. But macro and political slippage is a risk
here, as it is throughout the periphery.
In the UK, the recent data outturns have been looking stronger and we
expect a very solid growth rate in Q3. But the bar has been set high when it
comes to dissuading the Monetary Policy Committee (MPC) from expanding
QE again, and the Committee looks set to keep the faith that underlying
inflationary pressures are soft, even if the headline rate is bubbling up.
China will be stronger in
2013, but there are risks
that the downturn has a
larger structural element
The outlook for inflation
hasn’t changed much
For now, go with the bullflattening
move in
Treasuries
It would be remiss in any discussion of the global outlook not to mention
China. Growth here looks softer than expected and we do not expect it to
bottom until later this year. We expect growth to come back up to 8% in
2013, but there are risks that embedded in the slowdown is a more structural
story depicting overcapacity and competitiveness.
All told, then, the global economy is weaker than our July forecasts. For
inflation, though, the outlook hasn’t changed much. Weaker growth in some
parts of the world is offsetting supply shocks, leaving headline inflation rates
little different.
Near term, the reversal in the Treasury markets in the past few sessions has
caused many to question whether the sell-off and steepening that happened
on the back of the Fed’s QE announcement have already run their course.
We think this is only a short-lived retracement, driven in part by transient
factors, such as profit taking, the buyback schedule and Treasury supply in
the 2y, 5y and 7y sectors next week. For these reasons, for now, we would
go with the bull-flattening move, overweighting the 10y sector (vs. 5s and the
back end), as it tends to outperform on an RV basis, even if 10s30s flatten.
In the core eurozone markets, fundamental conditions favour a further
limited rally near term. We still see room for lower yields and flatter curves.
We are, therefore, maintaining our recommendation of being long Bunds in
duration terms. As far as liquidity spreads are concerned, they look very tight
at the moment. Core markets, in particular, now look cheap in ASW terms.
Longer-term monetary
loosening should support
risk assets and curve
steepening
Sell the USD into the rally;
we expect the dollar to
decline
Bye-bye, Market Mover
Longer term, open-ended QE from the US and the ECB’s bond buying
should help support risk assets, such as equities, so we expect the curve to
steepen heading into 2013.
In the FX market, investors have failed to leap on the Fed’s aggressive
announcement as a catalyst to establish new short USD positions. To the
contrary, investors have been trimming their risk-on positions and buying the
greenback. Our FX positioning analysis suggests that investors are currently
holding relatively light positions, suggesting the recent sell-off may be short
lived. We expect the USD to weaken against the commodity currencies in
the months ahead and favour long NZDUSD positions. In Europe, we expect
improving sentiment to continue to support EURCHF. Meanwhile, we expect
GBPUSD to rally substantially this year, but are waiting for a better
opportunity to establish a long position.
Our very first issue of Market Mover noted that the rebound from the Asian
crisis owed “a good deal to easy monetary policy in the US and Europe”. We
can only hope that our new, more focused global and regional publications
from next week will be able to make a similar claim before too long.
David Tinsley 20 September 2012
Market Mover
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