Market Mover - BNP PARIBAS - Investment Services India

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Market Outlook The market has already reacted positively to the EU statement on Greece - the conditions of any financial support will be key The Greek crisis has turned into a critical test of EMU, forcing EU officials to demonstrate greater coordination and solidarity. There is no alternative for Greece but to implement those fiscal measures already announced and probably more – pension reform will be discussed in the spring. But after pressuring Greece for several weeks to impose the necessary fiscal discipline, the outcome of the EU leaders’ summit on Thursday was a very clear message backing Greece. The statement represents progress. The EU has moved from an implicit to explicit commitment to protect Greece. Strict conditions attached could lend Greece the credibility it sorely needs. However, details are still lacking. We may get some details on a commitment to act if needed after the Finance Ministers’ meetings early next week. Details on potential financial assistance for Greece under strict conditions would further enhance market confidence – the 10y GGB/Bund spread has already compressed by roughly 90bp this week to close to 270bp, after peaking at 400bp at the end of January. Ultimately, the current debate is about EMU governments (Greece at this stage) giving up part of their independence in terms of fiscal policy; this has been the missing link within EMU since day one. The EMU framework may emerge strengthened from the current crisis although none of the governments will willingly cede fiscal autonomy. While the road is likely to remain bumpy, EMU political will is now strong enough to conclude that the highs on Greek spreads are behind us 480 430 380 10y GGB/Bund (ASW) GRE CDS 5y 480 430 380 240 190 10y PGB/Bund 10y GGB/Bund (RHS) 10y SPGB/Bund 400 300 330 280 230 Nov 16th: BoG triggers a sell-off in Greek Bonds with its warning on Greek banks 330 280 230 140 90 200 180 130 180 130 40 100 80 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 80 -10 Nov-08 Feb-09 May-09 Aug-09 Nov-09 0 Source: Reuters EcoWin Pro Core EGBs to give up some of their recent gains… …a move which could be reinforced by a negative tone on Treasuries The commitment of European political and monetary authorities to address the situation in a credible and coordinated way is a pre-condition for a durable compression of intra-EMU spreads. Support for peripherals will reverse part of the recent move towards safety although any setback on core EGBs is likely to be limited as govvies remain supported by other factors such as concerns about growth, the risk of tighter monetary policy in China and more regulation ahead. In other words, the overall mix for risk appetite is not favourable overall – as illustrated by the performance of the main equity indices since the start of the year. A limited sell-off of core EGBs would lead the curve to re-steepen slightly, allowing the 2-5-10y fly to rebound. This, our favourite scenario near term, is based on the ability of the European authorities to deliver a credible message to the markets. In the US, Bernanke said the FOMC’s policy outlook (“extended period”, subdued inflation etc.) has not changed since the last meeting and then Cyril Beuzit 12 February 2010 Market Mover 2 www.GlobalMarkets.bnpparibas.com
gave a few specific details on the Fed’s exit strategy. This was interpreted as stepping up the rhetoric on eventual tightening. The discount rate is likely to be raised at some point, although the discount window is barely used and had already failed the test of being a “cap on Libor” earlier in the crisis. The issue of paying interest on reserves is more relevant and could be bearish for Fed funds, which in turn will filter through to OIS, repo and Libor. All in all, Bernanke’s testimony could serve as the catalyst for even higher yields as the market’s attention shifts away from sovereign debt fears and back to the FOMC and major economic data. Recall that it only took a few positive data surprises for yields to jump. This asymmetric bias towards higher yields prompted us to be bearish at the start of the week; we remain in that camp. The technical picture looks fragile for Treasuries: when looking at a 2007/2010 daily chart, we see that the market has drawn a wide bottom head-and-shoulders pattern with a neckline at 3.83% on the 10y T-note; this level was tested in early January. JGBs likely to stay rangebound Whatever the exit to the current EMU crisis, the medium-term outlook looks negative for the euro The JGB market has fluctuated within a narrow range since the start of 2010 despite the global decline in stock prices. Intraday volatility has also fallen sharply, with the market showing very little reaction to factors that would ordinarily be considered buying or selling triggers. Next Tuesday's (16 Feb) 5yr offering is likely to be readily digested, given that banks remain awash with surplus funds. We see no obvious ramifications for the yen bond market from upcoming decisions regarding the EMU crisis; JGB yields are unlikely to rise by more than the tiniest amount while the Nikkei 225 remains mired near the 10,000 mark. In the FX market, the euro remains at the top of the agenda. While a European rescue package for peripheral bond markets could allow the EUR to benefit from a short covering rally, the long-term prospects remain outright bearish for the single currency. Deflationary adjustment pressures will be unleashed for almost a fifth of the eurozone economy, suggesting inflation is likely to undershoot the ECB’s internal staff projections. Rate and yield differentials should continue working against the euro in the medium term. At the same time, when the EUR loses yield and rate attractiveness, central bank reserve managers are less inclined to shift USD reserves into euros. Last year, currency reserves rose by an impressive USD 768 bln, mainly driven by Asia. China has printed money and, by its quasi-fixed USDCNY 6.82 exchange rate, has added to the supply of USDs. However, Asian monetary authorities generally and China’s in particular have started tightening monetary policy, imposing measures to curb hot money inflows even as net export growth is declining. As a result, currency reserve growth will ease, automatically reducing the supply of USDs added to the market and thus suggesting a lower EURUSD. Short GBP, long AUD & SEK A big currency investment theme is selling currencies where the credit multiplier is not working – as opposed to currencies benefiting from credit expansion. In the UK, the adjusted M4 has continued to decline, supporting our view that a high level of leverage is deflationary, especially if banks bear a substantial share of the leverage. The BoE’s revision of its two year inflation projection down to 1.2% will not bode well for the GBP as the sterling money market curve will have to flatten out. The performance of the GBP and 3x9 sterling FRA are tightly correlated. Hence, we expect sterling to remain under selling pressure. Australia and Sweden are two countries where there is a positive credit multiplier. The outperformance of the AUD and SEK has received additional support from the low sovereign debt levels reported in the countries. Cyril Beuzit 12 February 2010 Market Mover 3 www.GlobalMarkets.bnpparibas.com
Page 1: Market Economics | Interest Rate St
Page 5 and 6: More clarity was given on the seque
Page 7 and 8: Sovereign Debt: Time for Europe to
Page 9 and 10: The PS is more likely to face in th
Page 11 and 12: outlook for GDP and inflation. So h
Page 13 and 14: On inflation, Riksbank’s language
Page 15 and 16: Spending on other areas never did i
Page 17 and 18: would argue that resolving this iss
Page 19 and 20: Ramifications for Rates, Swap Sprea
Page 21 and 22: EUR: Demand for ECB’s Liquidity S
Page 23 and 24: EUR: Peripheral ASW Curves Re-Steep
Page 25 and 26: JGBs: Wait for Price Dips in Q2 •
Page 27 and 28: Table 1: BNP Paribas' Inflation For
Page 29 and 30: Table 3: BNP Paribas' Inflation For
Page 31 and 32: Table 1: BNP Paribas Carry Analysis
Page 33 and 34: Update on curves 5/10y indices’ c
Page 35 and 36: Technical Analysis - Interest Rates
Page 37 and 38: Trade Reviews Options, Money Market
Page 39 and 40: leave the euro significantly lower.
Page 41 and 42: open for further measures if requir
Page 43 and 44: EUR/SEK has broken sharply lower th
Page 45 and 46: Economic Calendar: 12 - 19 February
Page 47 and 48: Key Data Preview 115 105 95 85 75 6
Page 49 and 50: Key Data Preview Chart 5: Italian G
Page 51 and 52: Key Data Preview Source: Reuters Ec
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Key Data Preview Chart 13: Norwegia
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Key Data Preview Chart 17: UK Retai
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Economic Calendar: 15 February - 12
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Next week's T-Bills Supply Date Cou
Page 61 and 62:
Economic Forecasts GDP Year 2009 20
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Market Coverage Market Economics Pa
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