Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Europe was largely offline yesterday for an extended weekend but there was much going on elsewhere, particularly US president Donald Trump’s announcement on Saturday that he was suspending his promised tariffs on Chinese aluminium and steel. This détente triggered a quite decent relief rally on Monday, with the Aussie dollar being a notable beneficiary, says John J Hardy, Saxo’s head of forex strategy. “The feeling is that they’re talking and negotiating rather than just trading barbs,” he adds.
But other dangers loom elsewhere, with what Hardy calls “the political revolution in Italy” (the planned new anti-establishment/populist coalition government) being particularly worrying. Yesterday, the unsettling prospect of a broadly anti-EU government at the helm of the Eurozone’s third-largest economy sparked a dramatic widening is peripheral spreads versus bunds, with Italian yields naturally spiking hardest. “I have a hard time seeing any euro rally here as long as German-Italian spreads are this wide,” Hardy says.
For equities, the US-China thaw meant a one-day rally, says Peter Garnry, Saxo’s Head of Equity Strategy. “Obviously it’s positive for global growth but I don’t see it as a sufficiently positive catalyst to bring equities up to their January highs.”
“The political risk on equities is largely priced into Italian equities, but if you want to have a positive spin on this then stay away from Italian assets short-term but perhaps return later when things calm down. This government will hardly last very long and we’re likely to have new elections,” Garnry notes.
Oil, meanwhile, remains right up there around $80/barrel, thanks In part to the ongoing Iranian sanctions kerfuffle and a new threat of more stringent sanctions on Venezuela following its re-election of the hardline leftist Maduro at the weekend, says Ole Hansen, Saxo’s Head of Commodity Strategy. These twin themes will continue to affect oil in the days ahead.
Finally today, a few points from Kim Cramer-Larsson, Saxo technical analyst: “We’re in the final stage of an uptrend in the NSADAQ 100 and I think we’ll see another attempt to break the 7,000 level this week.” For the S&P500, Kim expects the 2,000 level to be tested in the next couple of days, while the DAX is struggling a little but remains in a rising channel with resistance around 13,000.
Quarterly Outlook
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Quarterly Outlook
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