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Reuters blog archive

from Counterparties:

MORNING BID – European Deflation

Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.

Some of the move in the euro will depend on the trend in European yields, where everything is going down – German Bunds continue to make their way rapidly toward zero, and Bund futures remain in an overwhelming bullish trend, per data from Bank of America-Merrill Lynch. Analysts there also anticipate the dollar is going to experience some kind of medium-term correction – but remains in rally mode otherwise. There’s a headwind there for equities from that – rising greenback makes U.S. goods more expensive, but the gains are still only in earlier stages, and haven’t pushed into territory that would otherwise indicate surprising strength that we haven’t seen in some time.

What’s happening in part is that there’s been a definitive change in how bond markets are viewed – even the peripheral markets like Spain and Italy are less favorable as investments when compared with the United States; Merrill analysts foresee more of a move into U.S. fixed income assets after several months of seeing European funds garner strong inflows (the count is $158 billion to $86 billion, favor the Europeans so far this year). So what’s going on here? Many investors have been perpetually frightened of “catching a falling knife,” and the number of big-name bond managers who have shied away from Treasuries on the assumption that the Fed was going to declare the party over in due course are a great many. “The perceived tail risk associated with Eurozone bonds is lower than that for U.S. bonds,” they write.

Then again, this year has been a class study in foiled expectations, particularly in the bond market. Rates have remained stubbornly low; the bullish investors in the government market have reaped big rewards, and even if the U.S. dollar creeps higher, the ongoing interest out of pension funds for higher yielding credit will continue to pressure yields. And Merrill sees more buying in the bond market from foreigners, an increasing percentage of that from Europe and other investors. That should again benefit the dollar, which is expected to stay near where it is.

from Counterparties:

MORNING BID – Down in the Jackson Hole

The markets ease into a traditionally slow period with not much to look forward to other than the Federal Reserve’s Jackson Hole conference due next week, where the highlight, naturally, will be anything Janet Yellen says regarding the state of the labor markets. The chances of the Fed signaling a new shift when it comes to policy are slim – Yellen has proved to be a cautious speaker thus far, interested in furthering Ben Bernanke’s way of telegraphing as much as possible when it comes to policy alterations, and Yellen is more so, her “six months” comment from a few months ago notwithstanding. As Jonathan Spicer and Howard Schneider reported a few days ago, Yellen is much more interested in fighting an inflation war than dealing with a persistent deflationary/lousy economic environment to dominate the headlines, so the expectation should be for lower rates for longer, and not to expect a lot of surprises out of Wyoming next week.

Goldman Sachs economists not that Yellen had sounded a bit more positive on the labor market in July, but even still their belief when it comes to the slack that exists in the jobs market is still too great to bear much more than the end of quantitative easing/bond buying and perhaps a move to a couple of small rate increases around the middle of next year that, well, won’t hurt too much given the Fed’s policy rate still sits between 0 and 25 basis points. The forecasts from Reuters most recently put the first rate hike somewhere in the April to June range, which fluctuates depending on the strength of the economic figures.

from Breakingviews:

BES bail-in leaves CDS traders struck out

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Banco Espirito Santo’s bail-in has been a nice earner for some bond traders. Anyone who bet that Portuguese authorities would save senior creditors but burn bonds lower down has made a killing. But anyone who tried to follow suit with BES credit default swaps will be feeling much less cheery.

from Breakingviews:

Argentine opportunity cost is reason to cut deal

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Argentina’s debt negotiators need to think about opportunity cost. A failure to reach agreement with holdout creditors by Wednesday might not make things immediately worse. But it would set back recent efforts to curry favor with international financiers – efforts that could pay off richly for the Argentine economy.

from Global Investing:

The people buying emerging markets

We've written (most recently here) about all the buying interest that emerging markets have been getting from once-conservative investors such as pension funds and central banks. Last year's taper tantrum, caused by Fed hints about ending bond buying, did not apparently deter these investors . In fact, as mom-and-pop holders of mutual funds rushed for the exits,  there is some evidence pension and sovereign  wealth  funds actually upped emerging allocations, say fund managers. And requests-for-proposals (RFPs) from these deep-pocketed investors are still flooding in,  says Peter Marber, head of emerging market investments at Loomis Sayles.

The reasoning is yield, of course, but also recognition that there is a whole new investable universe out there, Marber says:

from Breakingviews:

Japan’s bond-hugging banks are pinning Abe down

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Japanese lenders’ outsized government bond holdings have Prime Minister Shinzo Abe in a chokehold. Unless banks shed the load now, they might try to dump the debt when the Bank of Japan stops printing money and causes bond prices to fall. A stampede could rattle the financial system and dent Abe’s anti-deflation campaign.

from Breakingviews:

Banco Espirito Santo could lure periphery bulls

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Euro zone periphery bulls should be eyeing up Banco Espirito Santo. The troubled Portuguese bank’s shares were at one point down 20 percent on July 15, and it needs capital to stabilise itself. For hedge funds looking to profit from Europe’s banking recapitalisation, or an acquisitive bank, this is the moment to pounce.

from Global Investing:

Emerging markets; turning a corner

Emerging markets have been attracting healthy investment flows into their stock and bond markets for much of this year and now data compiled by consultancy CrossBorder Capital shows the sector may be on the cusp of decisively turning the corner.

CrossBorder and its managing director Michael Howell say their Global Liquidity Index (GLI) -- a measure of money flows through world markets -- showed the sharpest improvement in almost three years in June across emerging markets. That was down to substantially looser policy by central banks in India, China and others that Howell says has moved these economies "into a rebound phase".

from Counterparties:

MORNING BID – Minute by minutes

The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that's prevailed for the 10-year note for quite some time now, with the primary catalyst being today's release of the Federal Reserve's minutes from its most recent meeting. The relevant data that investors are probably paying most attention to - the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate - the rate at which people leave jobs for others - is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn't there yet.

And with that in mind, that means those investors clamoring for higher rates are probably going to continue to see their expectations unmet for a longer period of time, and with sovereign buyers from Europe and Japan wandering outside those halls, there's an ongoing bid in the market that continues to thwart short-sellers who are just waiting for that right moment to bet against the bond market. That's been a lonely trade of late - or rather, a popular trade, just a big loser as trades go.

from Breakingviews:

Don’t believe predictions of low interest rates

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Will the new normal for interest rates be lower than the old? It is rapidly becoming conventional wisdom that years of near-zero overnight rates will be succeeded by an indefinite period in which borrowing costs remain low by the standards of the last few decades. The new consensus is reflected in financial markets: the yield on 30-year U.S. Treasury bonds has fallen from 4 percent to 3.4 percent this year. But it is built on unsound foundations.

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