巴黎银行-欧洲-投资策略-欧元区与贸易机会：下半年的利率、曲线和息差前景-20190610-27页_3mb

Summary of "EUROZONE & TRADING OPPORTUNITIES" (June 2019)

Core Content

This report provides an outlook on interest rates, bond yields, and spreads in the eurozone and global markets for the second half of 2019. It includes macroeconomic forecasts, market dynamics, and potential trading opportunities based on current economic conditions, central bank policies, and geopolitical factors like US-China trade tensions.

Main Views

• US Economic Outlook:
  • Q1 growth was strong, but it is expected to weaken due to fading fiscal stimulus, tighter financial conditions, and trade tensions.
  • The Fed is anticipated to cut rates by 25bp in July and September 2019, with a possible hold through year-end.
  • US 10y yield is forecast to decline to 1.95% by Q3 2019 and 1.90% by December 2019, while the 2y yield is expected to drop to 1.40%.
• Eurozone Economic Outlook:
  • Eurozone GDP is expected to grow at around 1% for the rest of 2019.
  • Core inflation is anticipated to rise slightly due to wage growth, but overall inflation is expected to remain weak.
  • The ECB is seen as lagging behind in rate cuts, and the 10y Bund yield is expected to stay below zero for the rest of the year.
• Bond Yields and Spreads:
  • The 10y BTP/Bund spread is expected to widen, potentially reaching 300bp.
  • The 10y OAT yield is expected to remain cheaper than the 10y BTP and Bund, with a yield pick-up of around 40% vs Bonos and 60% vs Bunds.
  • The 10y BTP yield is forecast to reach 240bp by December 2019, with a possible further widening to 300bp in the short term.
  • The EGB credit curve is expected to steepen, with BTPs likely to outperform against the curve.
• Trade Tensions Impact:
  • US-China trade tensions are expected to negatively impact China's economy and global trade.
  • A potential trade deal is unlikely to resolve underlying tensions, and further escalation could lead to more tariffs.
  • The impact on rates is expected to be a flattening of the eurozone curve and a steepening of the US curve.

Key Information

• Macro Trends:
  • US growth is expected to slow, with inflation rising slightly.
  • Eurozone growth is seen as weak, with inflation expected to remain below target.
  • China's growth is expected to face additional headwinds from trade tensions.
• Interest Rate Outlook:
  • US: Fed is expected to cut rates in July and September 2019, with the 10y yield declining to 1.95% by Q3 and 1.90% by December.
  • Eurozone: 10y Bund yield is expected to stay below zero, with a possible rise in 2020.
• Bond Market Dynamics:
  • The 10y BTP/Bund spread is likely to widen, with a test of 300bp possible.
  • OATs are seen as relatively cheaper than BTPs and Bunds, with a seasonal richening period expected in mid-June.
  • Spanish net supply is expected to decline significantly, while Italian net supply is higher.
• Equity Market Outlook:
  • S&P 500 is expected to correct to 2580.
  • Eurostoxx 50 is moving from cheap to neutral valuation.
  • Equity valuations are showing signs of concern, with earnings revisions and recession probability signals.
• Trading Opportunities:
  • Long OAT invoice spread targeting 23/24bp.
  • Sell high coupon BTPs (5.5% Nov 22) vs low coupon BTPs (0.95% Mar 23), targeting -3bp.
  • 10y BTP spread is expected to widen due to weak equity markets and political tensions.
• Sovereign Ratings:
  • Core/semi-core sovereign ratings: Positive outlooks for Finland, Austria, and France.
  • Non-core sovereign ratings: Positive outlooks for Spain, Portugal, and Slovenia; negative outlook for Italy.
  • The Italian debt-to-GDP ratio is expected to rise to 139% by 2025 under conservative assumptions.
  • A stress scenario predicts a rise to 153% by 2025 due to a potential recession and higher yields.

Summary Table

Seasonal Patterns

• Bund Seasonality: Bullish from mid-June to mid-July, with a richening of ASW from the second week of June.
• Gilt Seasonality: Expected to sell off in June, with a 72% chance of a decline.
• EGB Credit Curve: Steepening from late May, with potential for a significant widening of BTP spreads.

Conclusion

The report highlights a complex macroeconomic landscape with mixed signals across the US, eurozone, and China. While the Fed is expected to cut rates, the ECB is seen as lagging, and trade tensions are likely to have a negative impact on the global economy. Bond yields and spreads are expected to reflect these dynamics, with BTP spreads widening and OATs remaining relatively cheaper. Equity markets show signs of correction, and trading opportunities are identified in the bond market, especially around the 10y BTP/Bund spread and OAT invoice spreads.