20180926-法国巴黎银行-EUROZONE___TRADING_OPPORTUNITIES_HEADWINDS_FOR_BONDS_AHEAD_OF_THE_END_OF_APP_61页_6mb

Eurozone & Trading Opportunities: October 2018 Update

Core Content Overview

This report provides an analysis of bond markets, focusing on yield trends, spread dynamics, and inflation expectations in the eurozone and related markets. It also outlines the expected impact of monetary policy changes and discusses the performance of government bond yields and spreads across key European countries and global economies.

Key Market Views

Yields and Spreads

• Bund yields experienced a seasonal rally from mid-June to mid-August 2018, with a year-end target of 75bp for the 10y Bund yield.
• Seasonality will be negative for Bunds in the first half of October.
• Non-core EGB spreads are expected to tighten, while core bonds remain relatively cheaper than swaps.
• The 10y OAT/Bund spread is expected to trade in a tight range.
• The BTP curve is too steep and may flatten further, as it is pricing in excessive rating downgrades.
• The Bono curve remains too steep, and the BTP/Bund spread is expected to tighten to 225bp by year-end, with a target of 200bp in 2019.
• Pension funds have improved positions, while insurers may increase buying of core bonds on higher yields.
• Bund ASW is expected to tighten, and OAT invoice spreads are also expected to narrow.

Monetary Policy Outlook

• The Fed is expected to hike interest rates twice in 2018 and once in 2019, with a balance sheet reduction that will impact yields more than structural factors.
• The ECB is expected to start normalizing deposit rates in Q3 2019, with 20bp hikes in September 2019 and Q1 2020.
• The end of ECB's APP in Q4 2018 is expected to lead to a rise in yields, particularly for the 10y Bund.

Inflation Expectations

• Eurozone core CPI is forecast to rise to 1.5% in late 2018 and 1.9% in 2019.
• Headline CPI is expected to end 2018 close to 2% and remain stable in 2019.
• The LICI (Leading Indicator of Core Inflation) suggests a rise in inflationary pressure, with values above zero indicating above average inflation.

Key EUR Trades

Outright Positions

• Short EUR 30y10y swap: Targeting 2% in Q3 2018, with a stop at 1.37%.
• Short Bundei-26 real rate: Targeting -1%, with 1/2/3 month carry at +4.5/+4.4/+0.4bp.
• Short BTP 2s10s flatteners: Targeting 200bp, with a 1m carry of -1.6bp.

Curve Strategies

• Bono 7s15s flattener: Targeting 100bp, with a first target at 114bp and a 1m carry of flat.
• BTP 5s10s30s fly: Profits booked, with a re-entry planned in high 10s.
• Short Bono 10y vs long BTP & Bund: Targeting 70bp, with a 2m carry of -0.7bp.
• EUR 3y expiry 2s30s conditional steepener: Entered at -1.9bp, targeting +13bp.
• Pay EUR 2s5s10s swap fly: Entered at -16bp, targeting -4bp, with a 3m carry and roll of -3.4bp.
• Pay USD 2s5s10s swap fly: Entered at 4bp, targeting 15bp, with a 1m carry of +1.5bp.

Spread Strategies

• Short Bund ASW: Rolled to Z8, with a target of 30bp.
• Short OAT invoice spread: Targeting mid-20s, with a re-entry planned in late October.
• Bono Oct 22/PGB Oct 22 widener: Entered at 12bp and 8bp, targeting mid-20s.
• OAT Apr 26/May 36 ASW box compression trade: Targeting 15bp, with a 1m carry of +0.1bp.
• Short Bund ASW vs 10y UST ASW: Targeting 30bp.

GDP and Inflation Forecasts

GDP Growth

• Global growth is expected to slow slightly to 3.6% in 2018 and 3.4% in 2019.
• US GDP is forecast at 2.8% for 2018 and 2.5% for 2019.
• Eurozone GDP is expected to grow at 2.0% in 2018 and 1.5% in 2019.
• China is forecast at 6.4% in 2018 and 6.3% in 2019.
• Japan is expected to grow at 0.9% in 2018 and 0.6% in 2019.
• UK is forecast at 1.3% in 2018 and 1.6% in 2019.
• Turkey is expected to slow to 3.9% in 2018 and 3.2% in 2019.
• Poland is forecast to grow at 4.8% in 2018 and 3.5% in 2019.
• South Africa is expected to grow at 1.3% in 2018 and 2.0% in 2019.
• Brazil is forecast at 1.5% in 2018 and 3.0% in 2019.
• Mexico is expected to grow at 1.5% in 2018 and 3.0% in 2019.
• Argentina is forecast at -1.5% in 2018 and 0.5% in 2019.
• India is expected to grow at 7.4% in 2018 and 7.6% in 2019.
• Indonesia is forecast at 5.1% in 2018 and 5.2% in 2019.

Inflation Forecasts

• US CPI is expected to rise to 2.5% in 2018 and 2.1% in 2019.
• Eurozone core CPI is forecast at 1.9% in 2018 and 1.9% in 2019.
• China CPI is expected to rise to 2.1% in 2018 and 2.5% in 2019.
• Japan CPI is forecast at 1.0% in 2018 and 0.8% in 2019.
• UK CPI is expected to fall to 2.4% in 2018 and 2.1% in 2019.
• Turkey CPI is forecast to rise to 14.7% in 2018 and 16.6% in 2019.
• Poland CPI is expected to fall to 1.7% in 2018 and 2.3% in 2019.
• South Africa CPI is forecast to fall to 4.7% in 2018 and 5.1% in 2019.
• Brazil CPI is expected to rise to 3.7% in 2018 and 3.7% in 2019.
• Mexico CPI is forecast to fall to 4.7% in 2018 and 3.5% in 2019.
• Argentina CPI is expected to rise to 31.2% in 2018 and 33.0% in 2019.
• India CPI is forecast at 4.8% in 2018 and 4.6% in 2019.
• Indonesia CPI is expected to fall to 3.5% in 2018 and 3.3% in 2019.

Rate and FX Forecasts

• Weaker dollar is expected in 2019.
• EURUSD is forecast to rise to 1.30 by Q4 2019.
• EURJPY is expected to fall to 127.
• GBPUSD is forecast to rise to 1.49.
• USDJPY is expected to fall to 98.
• USDCNY is expected to rise to 6.85.

Eurozone Growth and Inflation Outlook

• Eurozone growth is expected to remain solid but moderate.
• Headline inflation is expected to stay high.
• Fiscal policy is supportive in 2018-2019.
• Loan demand is rising as banks loosen credit standards.
• Job gains are supporting household sentiment.
• Headline CPI is expected to remain high due to structural factors.

Key Eurozone Countries: Wages and Labour Shortages

• Germany, France, Spain are experiencing significant wage increases and labour shortages.
• Italy has a subdued shortage of labour.
• G4 (US, euro area, Japan, UK) net supply of sovereign bonds is expected to be positive in 2018 and 2019.
• Japanese investors have turned net sellers of US Treasuries since October 2017.
• 10y OATs hedged into yen are now less attractive compared to long-dated JGBs.

QE Impact and Bond Valuation

• G4 QE flows have a significant negative correlation with 10y Bund yields.
• Bund valuation is influenced by macroeconomic variables, US 10y yields, and a QE premium.
• The QE premium for Bunds has tightened in September but remains high.
• ECB PSPP reinvestments are expected to cap long-term rates.
• Net supply of EGBs is expected to be negative in October and December.
• 2018 EGB net supply (after PSPP) is expected to be around EUR 189bn.
• 2018 EGB net supply (after PSPP) is expected to be more negative in September and November.

Conclusion

The report outlines a scenario of lower growth and higher core inflation in the eurozone and globally. It emphasizes the impact of monetary policy normalization, particularly the end of ECB's APP and Fed rate hikes, on bond yields. Tighter spreads and flattening curves are expected, especially for non-core bonds. Japanese investors are increasingly shifting their focus from European bonds to their own long-dated government bonds. The Bund yield is projected to rise to 75bp by Q4 2018, while the BTP/Bund spread is expected to tighten further. The report also highlights the importance of the LICI as a leading indicator for core inflation and the role of QE in shaping long-term bond yields.