Head of Fixed Income Strategy
Summary: US CPI numbers, stimulus talks and the ECB President Christine Lagarde's speeches are going to move the fixed income market this week. Risky assets will continue to be well bid, while volatility might pick up in the emerging markets as China's economic data are released.
European sovereign yields fell last week with the periphery leading the way. We expect this trend to continue throughout this week as the ECB President Christine Lagarde speaks today, Wednesday and Thursday. Expectations on more stimulus are rising as the central bank appears to be worried about a slow recovery and continuous rise in Covid-19 cases. We believe that European sovereigns will continue to rise at least until the end of the year with Italian BTPs gaining the most.
In the meantime, Brexit will continue to generate noise. Even though October 15th marks the end of the Brexit talks, it seems that the two parties are looking to extend the deadline for at least a month. On the back of this news, the market looked happy as the FTSE closed +2% up last week and cable moving to 1.3035 from the recent low of 1.2675.
Stimulus talks continue to be chaotic in the US; however, the S&P closed almost 4% higher at the end of last week as Trump opened up about the stimulus package. Risky assets also rose with the iShares iBoxx USD High Yield Corporate Bond fund (HYG:arcx) closing around 1.5% higher last week. Refer to our article to understand what is happening with Treasuries and why we expect a further steepening of the yield curve. This week's US inflation numbers might contribute to a further rise of 30-year Treasury yields. For those that want to position to take advantage of volatility, we believe that the 5s30s spread might give better insight to inflation than the 2s10s spread.
In the Saxo Platform, one can find the Lyxor US Steepening (STPU:xmil) which lets investors taking advantage of the steepening of the yield curve between 2 to 10 years. Otherwise, one can get exposures to longer-term maturities through CFDs tracking bond futures such as 30YUSTBONDDEC20, which tracks the 30-year US T-Bond future with December 2020 expiry.
Finally, we will be observing the emerging markets, especially China, as it releases several economic figures. The country is dealing with a default scare coming from the largest real estate group in the country, Evergrande. Even though the People’s of China will not allow such a large scale default, weaker than expected economic data may trigger a selloff in the emerging market world. We continue to be skeptical of the Sub-Saharan region and Turkey.
Main events to watch out for this week:
Monday 12th of October
Tuesday13th Of October
Wednesday14th of October
Thursday15th of October
Friday16th of October
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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.
