20181207-法国巴黎银行-EUROZONE___TRADING_OPPORTUNITIES_2019_SYNCHRONISED_SLOWDOWN_60页_6mb

Summary of EUROZONE & TRADING OPPORTUNITIES Report (December 2018)

Core Content

This report by BNP Paribas outlines the outlook for the Eurozone and global markets in 2019, focusing on economic trends, inflation expectations, and trading opportunities in fixed income markets.

Main Views

• Risk-off mode is ending: The risk-off rally since October has pushed Bund yields to very low levels, but they are expected to rise in Q1 2019 to mid-50s, with a rise above 75bp not expected before H2 2019 due to political uncertainty.
• Inflation and yields are expected to rise: The report forecasts higher inflation and yields, with core CPI in the Eurozone expected to reach 1.6% in 2019 and 1.7% in 2020. The ECB is expected to start normalizing the deposit rate in Q3 2019.
• Global deceleration: There is a synchronized slowdown in GDP growth across major economies, with the Eurozone expected to decelerate from 1.9% in 2018 to 1.4% in 2019 and 1.2% in 2020.
• Global Central Bank Stance: The G3 central banks are taking a less accommodative stance, which is likely to impact long-term rates.

Key Trading Opportunities

Outright Trades

• Higher real and nominal yields: Expected in the medium term.
  • Paid EUR 30y10y swap targeting 2% in Q3 2018 at 1.56% and 1.45%. Stop: 1.37%. 1y rolldown: +2bp.
  • Paid July 2019 ECB meeting at -34bp target -30bp. Stop: -37bp.

Curve Trades

• Non-core normalisation vs core: Expected to see a re-steepening in the Bund curve.
  • Bono 7s15s structural flattener at 114bp and 118bp. First target: 100bp. 1m carry: -0.2bp.
  • Switched from beta weighted 2s10s BTP flattening trade to DV01 weighted 3s10s BTP steepeners.
  • EUR 3y expiry 2s30s conditional steepener entered at -1.9bp targeting +13bp.
  • Pay USD 2s10s30s swap fly entered at 11bp. Target: 30bp. 1m carry and roll: +2.5bp.

Spread Trades

• Tighter ASW in December: Expectations for tighter spreads and some compression in OATs.
  • Long OAT invoice spread at 25bp switched into long OAT Nov 28 vs Bund Aug 28 at 38.5bp targeting 30bp.
  • Long Schatz ASW vs Bund ASW at 9.5bp (on H9) and 12bp. Target: 0/+2bp. Stop: 14bp.
  • Short Bund ASW at 55.8bp (would add on any move to 58.5bp). Target: 48bp.
  • OAT Apr 26/May 36 ASW box structural compression trade at 30bp. Target: 15bp. 1m carry: +0.1bp.
  • Bono Oct 22/PGB Oct 22 widener entered at 12bp and 8bp. Target: mid-20s.
  • Short Bund ASW vs 10y UST ASW at 47bp target 30bp.

Key Forecasts

GDP & Inflation

• Eurozone GDP: Expected to slow from 1.9% in 2018 to 1.4% in 2019 and 1.2% in 2020.
• Core inflation: Expected to rise to 1.6% in 2019 and 1.7% in 2020.
• Headline inflation: Stabilize at 1.8% in 2019, then slightly decelerate to 1.5% in 2020.

FX Forecasts

• EURUSD: Expected to rise to 1.17 in Q2 2019, 1.25 in Q4 2019, and 1.34 in Q4 2020.
• EURJPY: Expected to decline to 126 in Q2 2019, 125 in Q4 2019, and 121 in Q4 2020.
• USDJPY: Expected to decline to 108 in Q2 2019, 100 in Q4 2019, and 90 in Q4 2020.
• USDCNY: Expected to decline to 6.70 in Q2 2019, 6.85 in Q4 2019, and 6.50 in Q4 2020.

Interest Rate Forecasts

• Eurozone deposit rate: Expected to rise from -0.40% to -0.20% in Q3 2019, and to 0.00% in Q4 2020.
• Eurozone 2-year yield: Expected to rise from -0.61% to 0.00% in Q4 2019, and to -0.10% in Q4 2020.
• Eurozone 10-year yield: Expected to rise from 0.36% to 1.00% in Q4 2019, and to 0.90% in Q4 2020.

Key Indicators

• LICI (Leading Indicator of Core Inflation): A weighted average of eight variables, including capacity utilisation, unemployment gap, and price expectations. The indicator suggests core inflation will average 1.6% in 2019.
• Positive correlation with QE: The EUR 10s30s curve shows a positive correlation with G4 QE, while the 10y Bund yield shows a negative correlation.
• Negative correlation with risk-off: The Bund yield has been negatively correlated with risk-off and eurozone stress.

Bond Flows and Reinvestments

• Japanese flows: Net buyers of OATs and EGBs since October 2017, with OATs being the main vehicle for investment.
• ECB PSPP reinvestments: Expected to be around EUR15bn/month next year, capping long-term rates.
• EGB redemptions: Expected to peak in 2019 and stay high in 2020, with the biggest redemptions in Germany and Italy.
• Total PSPP reinvestments: Over EUR800bn by the end of 2027, with the Big 4 (Germany, France, Italy, Spain) expected to be around EUR126bn in 2019.

Carry & ROLLDOWN Opportunities

• Carry and rolldown profit: Still attractive for 5y BTPs.
• 1y carry and rolldown: Higher for 5y BTPs compared to mid-September, with some countries showing higher values.
• 5y carry and rolldown: Now higher than mid-September levels, while 3y and 10y are not as strong.

Conclusion

The report highlights a shift from risk-off to risk-on dynamics in the Eurozone, leading to potential increases in inflation and yields. It suggests that the ECB will begin to normalize monetary policy in Q3 2019, with a focus on the 10s30s curve and the impact of QE reinvestments. Trading opportunities include outright trades, curve trades, and spread trades, with a particular focus on BTPs and Bunds. The report also emphasizes the importance of carry and rolldown for 5y BTPs and the role of Japanese investors in the Eurozone bond market.