Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Commodity markets edge up on travel optimism but also as China vows to provide support to manufacturing and housing seeing Copper rise for the first day in 7-days, Iron ore charge 2% after 8-days of falls. Also helping sentiment is that President Biden and RBA governor calmed recession nerves. Meanwhile, broad equites look set for a bear market recapture rally, yet long term downside risk remains as central bank hawkishness is in tact amid 1970s style inflation risks. Revlon’s shares catch excitement but we urge caution as debt exceeds revenue 1.5 times. The International Air Transport Association (IATA) expects the airline industry to book profits next year, which reinforces our thinking that pent-up travel demand will pick up this US and European summer, supporting global travel stocks and Europe’s Stoxx Travel & Leisure index.
Revlon shares are still down a long way (78%) from their high as the ailing beauty brands business has seen revenue roll away, before filing for bankruptcy. The company will continue to operate, but filing for bankruptcy gives the company time to reorganize debt and give the company a much needed makeover. This could also serve as an opportunity to be taken over. But the issue is Revlon’s debt exceeds revenue 1.5 times and it has weak liquidity in a very competitive market. Revlon expects to receive $575m in debtor-in-possession financing to support operations.
A sense of calm in the APAC markets
APAC markets snapped their losing streak after the holiday-thinned markets overnight as President Biden's comments helped recession concerns recede somewhat. Bitcoin also reversed the weekend slide, sending a sense of momentary calm to the markets. However, commodity markets edge up on travel optimism but also as China vowed to provide support to manufacturing and housing. Copper rose higher, snapping its 7-day decline, Iron ore rose 2% after 8-days of falls. Australia’s ASX200 is up 1.4% after the RBA governor threw cold water on the idea of a recession, while he also said inflation will likely peak this year. That seemed to calm investors nerves with buying in Financials and Staples picking up. However, the most action is in Energy, Materials after commodity markets rebounded. The next upper level for the ASX to hit is 6,589. Japan’s Nikkei (NI225.I) led the gains in Asia, up 1.8%, as energy stocks rallied with oil prices going higher. Singapore’s STI (ES3) was also in gains of 0.6% as Singapore Airlines rose close to 2% with IATA’s optimistic outlook for travel bookings into the next year.
Crude oil prices (OILUKAUG22 & OILUSJUL22) recovered on Tuesday morning in Asia as recession fears took a backseat and risk sentiment revived. President Joe Biden pushing back against the idea of a recession as well, bolstering the case for continued demand for energy. WTI crude jumped back to $112/barrel while Brent touched $115/barrel.
Gold (XAUUSD) and other precious metals are stuck in a range as the tug of war between inflation and recession concerns pans out. While gold remains an inflation hedge, the surge in US treasury yields will continue to cap gains especially if we get closer to pricing in another 75bps rate hike from the Fed in July. Only after recession concerns take over inflation and US yields top out do we see a case for sustained gains in Gold, but we maintain our bullish view on gold and expect it to print a new high in the second half of this yea
Aussie dollar (AUDUSD) rises for the second day, heading back to towards 0.70. The RBA Governor said a 0.5% hike was business as usual. The RBA also warned of the lessons on 1970s style inflation when inflation changed people’s perceptions of expectations. Setting this tone give the RBA room to be more hawkish. This also reaffirms Saxo’s hawkish view that the door is open to a 0.75% hike at the next meeting. On top of that the RBA Governor Lowe also dismissed the idea of a local recession, and said more rate rises are certain, although a 4% rate at the end of the year is unlikely. If the AUD breaks above 0.7070 it could move up the next level of 0.712 or 0.718. Click here for more.
ECB President Lagarde testified before the committee on economic and monetary affairs of the European Parliament. She said the Bank intended to raise rates by 25bps July, which is a dampener after Fed’s 75bps rate hike last week. She said rates will rise again in September but lacked any information on an anti-fragmentation tool which will likely keep limiting the pace of tightening. EURUSD has been firmer above 1.05 but lacked momentum.
---
For a weekly outlook – tune in to our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
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. This content is not intended to and does not change or expand on the execution-only service. 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/en-gb/legal/disclaimer/saxo-disclaimer)