Thursday, 28 MayHamish Risk | May 27, 2015
The resurgent US dollar, and further softening of oil prices has been a popular subject line for analysts and market strategists in recent days as they attempt to pin point the sustainability of the move that has seen it continue to rally against the yen and the euro, despite news that Greece may have reached an agreement with its creditors and were starting to draft a technical level agreement. A light data docket in the US has left many analysts pondering the next move in yields, with several reports arguing the reaction to mildly stronger data in the coming months could be far greater than expected because so few expect a rate hike in September. There was also some focus given to headlines from the PBoC that the economy still faces downward pressure, and many point to the growing dichotomy between weak data and an equity market that is surging. This will continue to get lots of attention.
European credit BAML
1. Life on planet QE is….strange (especially in credit)
When QE started in early March, risk assets rallied, bund yields almost halved, but corporate bond spreads went noticeably wider. In April and May, amid the bund tantrum, risk premiums have risen, government bond yields have surged higher, yet corporate bond spreads have been heading tighter. The odd moves in credit reflect the speed at which bunds have been whipped around, rather than changing perceptions of corporate fundamentals, says Bank of America Merrill Lynch. In this note, BAML discuss the merits and the cash/cds basis trade, and its views on core Europe credit versus the periphery and high-yield basis themes, and names to watch.
Oil Credit Suisse
2. Oil’s excess speculation
With net long positions in oil having risen to all-time highs, it may be time for the recent rally to take a breather, writes Credit Suisse. Historically speaking, once very elevated speculative positions start to roll over, the oil price has fallen significantly (with the oil price falling by between 12% and 60% on the last 4 occasions that speculative positions rolled over from very high levels), notes Credit Suisse. In this wide ranging note, Credit Suisse’s equity research team examine Saudi Arabia’s battle for market share, and what that means for oil’s price action as well as multiple tactical plays, across a variety of sectors, that take advantage of the recent rally, which maybe coming to an end.
China Gavekal Dragonomics
3. China’s inclusion in SDRs matters
For the last decade Beijing and the IMF have fought a bitter war of words over the alleged undervaluation of China’s currency. That conflict formally ended on Tuesday when Deputy Managing Director David Lipton announced that the IMF the renminbi is no longer undervalued, says Gavekal Dragonomics. This was no surprise for the market, says Gavekal, but it does set the stage for an increased global role for the RMB in line with China’s over-arching and non-negotiable goal: for China to regain its rightful place at the centre of global economics, markets and politics. Things seem to be heading in the right direction after Lipton made clear that the IMF was onboard in having China’s currency status recognized by inclusion in the currency basket for the IMF’s Special Drawing Rights. Such an inclusion is a symbolic issue, notes Gavekal, but this piece explains many of the measures that China is implementing to become a globally important financial market. These developments need to be followed closely, as does its relations with the US which span everything from the creation of new supranational, global trade agreements and military brinkmanship.
RBNZ easing Redward Associates
4. Why the RBNZ needs to cut rates
On April 23 the Reserve Bank of New Zealand left the door open for the prospect of monetary easing. For some analysts this seemed to signal an admission by the RBNZ that monetary conditions were inconsistent with the central bank being able to achieve its 2% inflation target mid point. With the door ajar, they now need to act with more than one rate cut, writes Redward Associates. This is far from the consensus view among forecasters, and this report analyses in detail the outlook for core inflation, GDP, and some key drivers, not least the Fonterra’s outlook for dairy prices, as the basis for its view on the required monetary accommodation.
Japan Lombard Street Research
5. Risks for JGBs on Japan rebalancing
Recent failed JGB bond auctions have once again highlighted the risks of Japan’s monetary experiment, writes Lombard Street Research, who have produced some very detailed analysis the portfolio rebalancing that has taken place in Japan since last year. This was initiated by Government Pension Investment Fund’s (GPIF), but has yet to be followed by private sector pension funds. As Lombard notes, GPIF’s actions are just the beginning. The note then points to the potential risks to the domestic fixed income market, and Japan’s vulnerable fiscal position.