BTPs set for a bearish break

Trade View

Strategic Trade / Sell

Althea Spinozzi

Senior Fixed Income Strategist

Instrument: FBTPZ8
Price Target: 114.0
Market Price: 121.2

Background:

[Editor's note: this Trade View was co-authored with Saxo Bank technical analyst Kim Cramer Larsson.]

Since the populist Five Star/Lega coalition took power in Italy, the country’s standing within the European Union has grown less clear. What is clear, however, is that the new government is looking to implement expensive domestic policies which will increase the deficit of an already over-leveraged country. Italy’s debt-to-GDP ratio stands at 131%, second only to Greece in Europe; Brussels wants it to contain the deficit and while Italy’s minister of Economy and Finances Giovanni Tria is trying to do so by looking not to exceed 1.5% in deficit, his stance is finding opposition from other politicians which argue that it is necessary to go over the 3% deficit limit imposed by the EU in order to implement new policies and to invest in infrastructure.

Concerns are also arising regarding Rome’s intentions to remain in the EU. This comes on the back of reports that Italian politicians have been seeking support in the form of sovereign debt from countries outside the EU, most notably the US and Russia.

This might be a signal that Italy is preparing for a referendum.

We believe that political risk will remain high, especially during the months of September and October when Italy is due to present the 2019 budget. Another, related risk is that Moody’s could potentially downgrade its rating by one notch, making its sovereign debt rating just one notch above junk.

Parameters:

Entry: Market
Stop: 125.50
Target: 114.0
Time Horizon: one to two months

‪‪

Management And Risk Description:

Euro-BTPs can be traded both as CFDs and futures, with the choice depending on your risk profile and desired exposure. Clients can choose their stops depending on their risk/reward appetite; although we expect Euro-BTPs to fall, there might be some rebound in the short term depending on news. Because we expect this instrument to break bearish between mid-September and the beginning of November, we are using the December contract as the September one expires next week.

Please refer to chart below, which depicts the continuous current contract for Euro-BTPs, which until September 6 will be the September contract (FBTPU8) before rolling into the December one (FBTPZ8).

The September contract currently trades with a spread of 1.95 above the December contract (FBTPZ8).

After the massive sell-off in May, Italian BTPs have traded in a corrective sideways fashion between 120 and 130, which was the 50% retracement of the selloff.

The bear trend seems to have resumed with support at around 122. That support is likely to be tested once again and quite possibly broken. A close below could fuel another sell-off that could take BTPs towards a test of the next support area between 114 and 116.50 (with some minor support at 120).

The bearish picture is supported by a sub-40 RSI with no divergence, indicating a lower low. If BTPs close above 125.25, the short-term bearish picture will be cancelled. For a demolition of the longer-term bearish picture, a close above 130 is needed.

Quarterly Outlook Q4 2023

Bond. Long Bond(s)

Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.

Steen Jakobsen,
Chief Investment Officer
Read article
The road to a bond bull market is paved, although challenges remain
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.

Althea Spinozzi,
Senior Fixed Income Strategist
Read article
FX: King dollar and its far-reaching repercussions
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.

Charu Chanana,
Market Strategist
Read article
Equities: Higher cost of capital is getting painful
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.

Peter Garnry,
Head of Equity Strategy
Read article
Commodity sector supported by peak rates, tight supply focus
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy

Read article
No one's indestructible
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
Read article
Time to (re)consider bonds
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.

Peter Siks,
Investment Coach
Read article

You can access both of our platforms from a single Saxo account.

Preview platform Open Account

A compiled overview of Trade Views provided on Home.saxo can be found here (https://www.home.saxo/insights/news-and-research/trade-views/report).

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

BTPs set for a bearish break

Strategic Trade / Sell

Althea Spinozzi

Share

Latest Market Insights

Quarterly Outlook Q4 2023

Bond. Long Bond(s)

The road to a bond bull market is paved, although challenges remain

FX: King dollar and its far-reaching repercussions

Equities: Higher cost of capital is getting painful

Commodity sector supported by peak rates, tight supply focus

No one's indestructible

Time to (re)consider bonds

Your browser cannot display this website correctly.