Head of Fixed Income Strategy
Summary: Prepare for a volatile week. With the US election barely one week away, we will see capital flying to safety and a flattening the US yield curve due to uncertainty. It will be just a momentaneous move as in the long-term, US yields will continue to rise as more stimulus is coming regardless of the winner. In Europe, a spike in coronavirus cases will cause a widening of the spread between Italian BTPs and the Bund to levels seen at the beginning of the year. Cheaper BTPs represent a buying opportunity as the ECB will be forced to print more money to support further the European economy.
Europe
As coronavirus cases rise and new lockdown measures are imposed, we expect to see a run to safety and a selloff in the periphery. Spanish and Italian sovereigns are going to suffer the most as Covid-19 cases rose to new record levels. Both countries have implemented new lockdown restrictions that will inevitably increase deficit spending and social tensions. We are monitoring closely the Italian 30-year BTPs, which continue to trade rich compared to its counterparties. We believe that as the spread between the 30-year BTPs and the Bund widens it creates the perfect buying opportunity. In the next few months, we expect the ECB to ease monetary policy further, pushing the yields of the periphery to a new record low. For more click here.
United States
The US election will be in the spotlight as we are just one week away from the result. An agreement on stimulus will most likely not be reached before the election day. Thus, the economy is running into the risk that there will not be stimulus until February 2021. If that were the case, we might see the Federal Reserve being more forceful on fiscal spending and increasing their bond purchases in order to match specific policies such as unemployment benefits. Such policies will put more pressure on US Treasuries as such stimulus will be hard to unplug in case of inflation overshooting. Therefore, even though in the short-term we might see the US Yield Curve flattening slightly amid uncertainty, in the long-term, we will continue to see a 5s30s bear steepening. The 2s10s part of the yield curve will not move much as the Federal reserve controls it.
In the corporate credit space, the market will continue to focus on primary issuance rather than corporate earnings. This week we have Alphabet, Amazon and Apple releasing third-quarter earnings reports. I expect these names to continue to trade stable, especially because uncertainty produced by the US election will support quality assets.
Surprisingly, primary junk bond issuance continues to price new deals, notwithstanding volatility. Last week we saw $6bn junk bonds pricing in the primary market with orders more than three times the deal size. As companies fear a rise in borrowing costs, we might see more junk bond issuance until year-end.
Economic Calendar this week:
Monday, October 26th
Tuesday, October 27th
Wednesday, October 28th
Thursday, October 29th
Friday, October 30th
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
