20181025-法国巴黎银行-EUROZONE_TRADING_OPPORTUNITES_63页_6mb

Summary of EUROZONE & TRADING OPPORTUNITIES Report (November 2018)

Core Content

This report provides an analysis of the eurozone's macroeconomic and political risks, along with trading opportunities in government bonds and interest rates. It outlines the views on yield movements, inflation expectations, and the impact of monetary policy on bond markets.

Key Views

• Near-term Risk Off Mode: Markets are expected to remain risk-off, with Bund yields possibly retesting mid-30s due to tensions between the EU Commission and the Italian government by early November.
• Yield Outlook: The 10y Bund yield is projected to reach 75bp by year-end. Non-core curves are expected to flatten, while the short end of the EUR curve has adjusted lower after the June ECB meeting.
• Inflation Expectations: Core CPI in the eurozone is anticipated to rise to 1.5% by early 2019, with headline CPI ending the year close to 2%. Inflation is expected to remain stable around 1.5% and 1.9% in 2019.
• Monetary Policy Impact: The end of the ECB's asset purchase programme in Q4 2018 and the Fed's policy normalization are expected to have a more significant impact on yields than structural factors.

Key EUR Trades

• Outright Positions:

  • Paid EUR 30y10y swap targeting 2% in Q3 2018 at 1.56% and 1.45%, with a stop at 1.37%.
  • Paid July 2019 ECB meeting at -34bp target -30bp, with a stop at -37bp.

• Curve Trades:

  • Tactical EUR 1y fwd 5s10s30s swap fly receiving at 15 and 18bp, targeting 5/7bp.
  • Bono 7s15s structural flattener at 114bp, targeting 100bp.
  • EUR 3y expiry 2s30s conditional steepener entered at -1.9bp targeting +13bp.
  • Pay USD 2s10s30s swap fly entered at 11bp, targeting 30bp.

• Spread Trades:

  • Tactical long OAT invoice spread at 25bp, targeting 32/33bp.
  • Long Schatz ASW vs Bund at 10.5 and 12bp, targeting 0/+2bp.
  • Short Bund ASW at 54.7bp (rolled to Z8), with profits booked and a re-entry planned in late November/December.
  • Bono Oct 22/PGB Oct 22 widener at 12bp and 8bp, targeting mid-20s.
  • OAT Apr 26/May 36 ASW box compression trade at 30bp, targeting 15bp.
  • Short Bund ASW vs 10y UST ASW at 47bp, targeting 30bp.

GDP & Inflation Forecasts

• GDP Forecasts:

  • US: 2.8% (2018), 3.6% (2019)
  • Eurozone: 2.0% (2018), 1.5% (2019)
  • Global: 3.6% (2018), 3.4% (2019)

• Inflation Forecasts:

  • US: 2.5% (2018), 2.1% (2019)
  • Eurozone: 1.9% (2018), 1.5% (2019)
  • China: 2.1% (2018), 2.5% (2019)
  • Japan: 1.0% (2018), 0.9% (2019)
  • UK: 2.4% (2018), 2.1% (2019)
  • Turkey: 3.9% (2018), 3.2% (2019)
  • Poland: 4.8% (2018), 3.5% (2019)
  • South Africa: 1.3% (2018), 2.0% (2019)
  • Brazil: 1.5% (2018), 3.0% (2019)
  • Mexico: 1.5% (2018), 3.0% (2019)
  • Argentina: -1.5% (2018), 0.5% (2019)
  • India: 7.4% (2018), 7.6% (2019)
  • Indonesia: 5.1% (2018), 5.2% (2019)

Rate & FX Forecasts

• USD is expected to weaken in 2019, with EURUSD likely to rise to 1.25-1.30.
• Interest Rate Outlook:
  • US Fed funds: 1.75-2.00 (Spot), 2.25-2.50 (Q4 2018), 2.50-2.75 (Q2 2019), 2.50-2.75 (Q4 2019)
  • US 2-year: 2.66 (Spot), 2.95 (Q4 2018), 3.10 (Q2 2019), 2.50 (Q4 2019)
  • US 10-year: 2.88 (Spot), 3.10 (Q4 2018), 3.20 (Q2 2019), 3.00 (Q4 2019)
  • Eurozone 2-year: -0.58 (Spot), -0.45 (Q4 2018), 0.00 (Q2 2019), 0.30 (Q4 2019)
  • Eurozone 10-year: 0.38 (Spot), 0.75 (Q4 2018), 1.00 (Q2 2019), 1.20 (Q4 2019)

Eurozone Growth & Inflation

• Eurozone Growth: Expected to be solid but moderate, with headline inflation likely to stay high in early 2019.
• Fiscal Policy: Supportive in 2018-2019.
• Labour Market: Shortage of labour and rising wages are expected to support inflationary pressures.
• Leading Indicator of Core Inflation (LICI): Shows inflationary pressure rising, with a lag of about 12 months.

Key EUR Countries

• Germany: Core CPI inflation is expected to rise towards 1.5% by early 2019.
• France: Positive net supply in 2018 and 2019.
• Italy: Subdued shortage of labour, but still a significant net seller of BTPs.
• Spain: Acceleration of labor shortage in 2018.

QE Impact on Yields

• Negative Correlation: Between G4 QE and 10y Bund yield, with a positive correlation with 10s30s curve.
• QE Premium: Bund yields have been influenced by a QE premium, which has tightened in early October.
• Correlation Data:
  • Bund 10y: -77.4%
  • US 10y: -56.5%
  • EUR 10s30s: 65.6%
  • USD 10s30s: -5.8%
  • Bund 2s10s: 5.2%
  • US 2s10s: -14.7%
  • Bund 10s30s: 42.6%
  • USD 10s30s: 3.6%

Japanese Bond Flows

• Net Selling of US Treasuries: Since October 2017, Japanese investors have turned net sellers of US sovereign bonds, with a cumulative net flow of EUR-84bn.
• Net Buying of EGBs: Since May 2017, Japanese investors have net bought EGBs, with EUR38bn in purchases.
• Net Selling of Bunds: For five consecutive months, Japanese investors have net sold Bunds.
• 10y OATs: Hedged into yen have been more attractive than US 10y since Dec 2015, and have cheapened versus 30y JGBs in early October.

EGB Supply Statistics

• 2018 Net Supply: Expected to be around EUR189bn, with PSPP purchases falling to EUR174bn.
• Supply Trends: Net supply is most negative in October and December, with the highest net supply in September and November.
• German Net Supply: Spiked back in November, indicating increased demand for German bonds.

Conclusion

The report highlights the expectation of higher core inflation and yields in the eurozone, driven by the end of the ECB's asset purchase programme and the Fed's policy normalization. It outlines various trading strategies based on bond curve movements, spread opportunities, and the impact of QE on bond yields. Additionally, it discusses the role of Japanese investors in the eurozone bond market and their shift from net buying to net selling in certain periods.