Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Brexit and US inflation in focus this week
John J. Hardy
Chief Macro Strategist
Summary: Focus this week will be on whether the emergency Brexit summit results in a further long delay and uncertainty or a clearer path forward. Elsewhere, the latest US inflation data and FOMC minutes are up on Wednesday.
Friday left us little the wiser on where markets are headed, although the verdict from the US treasury market after the US March jobs numbers was perhaps the most important signal, given that the US 10-year yield benchmark has reached the pivotal 2.50-2.60% yield area.
On Friday, fresh weakness in treasuries was brushed back as strong buying came in to drive yields back lower. An inability for longer US yields to punch higher through this level would suggest underlying weaker risk sentiment and concern for the global growth outlook and thus an inability to engage the “1998 melt-up scenario” in which markets celebrate a panicky accommodative dovish retreat from the Fed a la Greenspan’s response to the LTCM / Asian financial crisis fallout back in 1998.
The Brexit pressure cooker this week will remain relentless as virtually all scenarios remain on the table ahead of a Wednesday emergency EU summit at which it isn’t even clear the UK will be able to present a clear plan to the EU for what comes next. UK Prime Minister Theresa May hasn’t been able to agree on terms for a Brexit with Labour opposition leader Jeremy Corbyn. For sterling to maintain the nervous range of late, we’ll need to see the EU and UK leadership punting the decision timeframe out several months. Surely the ultimate destination is a second referendum with No Deal as one of the options?
While US treasuries were supported late Friday, strong risk sentiment and widespread complacency are in evidence almost everywhere, from corporate credit to emerging market spreads. And implied options volatilities have collapsing to close to record lows in the major currencies and would probably be at record lows were it not for still elevated fears of a disruptive move in sterling.
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0400
Waiting for breaks in key USD pairs for possible long USD trades
Chart: AUDNZD
One of the few moves of note last week, AUDNZD jumped to attention last week on hopes that hopeful data out of China and booming key commodity prices – particularly iron ore – will offer AUD relative support to its smaller Antipodean cousin, the kiwi. The rally through 1.0450-1.0500 suggests a structural low is in for the pair. The next major hurdle is the pivot high above 1.0600 and the 200-day moving average, now dropping below 1.0700.
On Friday, fresh weakness in treasuries was brushed back as strong buying came in to drive yields back lower. An inability for longer US yields to punch higher through this level would suggest underlying weaker risk sentiment and concern for the global growth outlook and thus an inability to engage the “1998 melt-up scenario” in which markets celebrate a panicky accommodative dovish retreat from the Fed a la Greenspan’s response to the LTCM / Asian financial crisis fallout back in 1998.
The Brexit pressure cooker this week will remain relentless as virtually all scenarios remain on the table ahead of a Wednesday emergency EU summit at which it isn’t even clear the UK will be able to present a clear plan to the EU for what comes next. UK Prime Minister Theresa May hasn’t been able to agree on terms for a Brexit with Labour opposition leader Jeremy Corbyn. For sterling to maintain the nervous range of late, we’ll need to see the EU and UK leadership punting the decision timeframe out several months. Surely the ultimate destination is a second referendum with No Deal as one of the options?
While US treasuries were supported late Friday, strong risk sentiment and widespread complacency are in evidence almost everywhere, from corporate credit to emerging market spreads. And implied options volatilities have collapsing to close to record lows in the major currencies and would probably be at record lows were it not for still elevated fears of a disruptive move in sterling.
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0400
Waiting for breaks in key USD pairs for possible long USD trades
Chart: AUDNZD
One of the few moves of note last week, AUDNZD jumped to attention last week on hopes that hopeful data out of China and booming key commodity prices – particularly iron ore – will offer AUD relative support to its smaller Antipodean cousin, the kiwi. The rally through 1.0450-1.0500 suggests a structural low is in for the pair. The next major hurdle is the pivot high above 1.0600 and the 200-day moving average, now dropping below 1.0700.
The G-10 rundown
USD – the powerful erosion of US rate spreads on the Fed’s dovish pivot has done little to damage US dollar strength. Next test for the greenback arrives with this Wednesday’s CPI data for March.
EUR – the EURUSD supermajor heavy on the 1.1200 area after finding little bounce last week. Brexit must be weighing to a degree here in terms of willingness to trade the currency. Three-month implied volatility in EURUSD punching to new lows for the cycle and, at 5.28% as of this writing, is almost within half a percent of the all-time low from 2014 of 4.76%.
JPY – JPY crosses turned back lower with US yields on Friday – likely the dominant focus here for the yen. Thee “meltup scenario” would likely drive yen weakness, while renewed concern on the global growth outlook and lower long yields would drive a yen snapback – AUDJPY the high beta pair for trading these forces.
GBP – the nervous range continues as it’s not at all clear this week will produce anything decisive – short dated sterling volatility trading near 1-month lows.
CHF – EURCHF remains relatively heavy in the 1.1200 area – mildly surprised that recent strong risk sentiment hasn’t driven a more notable rally – there hasn’t been particularly strong evidence of a Brexit uncertainty premium.
AUD – riding high versus the struggling kiwi, but pulled in two directions by supportive commodity and China developments on the positive side and concerns that the RBA is set to cut to ease the pain of the housing bubble unwind.
CAD – USDCAD coiling around without conviction as we await developments from here. The risk appetite and energy market backdrop has been about as supportive as possible, but Bank of Canada expectations have failed to track this as the housing slowdown and weak growth are holding the currency back.
NZD – it appears AUDNZD has turned the corner, as we discuss above, and the shift in the Reserve Bank of New Zealand guidance to a cutting bias could keep the kiwi on its backfoot for the medium term.
SEK – the krona needs indication of an improvement in the European growth outlook to push down through the 10.35-40 area in EURSEK.
NOK – the strong oil prices and Norwegian short rates up at their highest level since 2014 doing all they can to support NOK, but EURNOK continues to languish in the range – can’t we at least get a test toward 9.50-40 here?
Upcoming Economic Calendar Highlights (all times GMT)
1215 – Canada Mar. Housing Starts
1400 – US Feb. Factory Orders
USD – the powerful erosion of US rate spreads on the Fed’s dovish pivot has done little to damage US dollar strength. Next test for the greenback arrives with this Wednesday’s CPI data for March.
EUR – the EURUSD supermajor heavy on the 1.1200 area after finding little bounce last week. Brexit must be weighing to a degree here in terms of willingness to trade the currency. Three-month implied volatility in EURUSD punching to new lows for the cycle and, at 5.28% as of this writing, is almost within half a percent of the all-time low from 2014 of 4.76%.
JPY – JPY crosses turned back lower with US yields on Friday – likely the dominant focus here for the yen. Thee “meltup scenario” would likely drive yen weakness, while renewed concern on the global growth outlook and lower long yields would drive a yen snapback – AUDJPY the high beta pair for trading these forces.
GBP – the nervous range continues as it’s not at all clear this week will produce anything decisive – short dated sterling volatility trading near 1-month lows.
CHF – EURCHF remains relatively heavy in the 1.1200 area – mildly surprised that recent strong risk sentiment hasn’t driven a more notable rally – there hasn’t been particularly strong evidence of a Brexit uncertainty premium.
AUD – riding high versus the struggling kiwi, but pulled in two directions by supportive commodity and China developments on the positive side and concerns that the RBA is set to cut to ease the pain of the housing bubble unwind.
CAD – USDCAD coiling around without conviction as we await developments from here. The risk appetite and energy market backdrop has been about as supportive as possible, but Bank of Canada expectations have failed to track this as the housing slowdown and weak growth are holding the currency back.
NZD – it appears AUDNZD has turned the corner, as we discuss above, and the shift in the Reserve Bank of New Zealand guidance to a cutting bias could keep the kiwi on its backfoot for the medium term.
SEK – the krona needs indication of an improvement in the European growth outlook to push down through the 10.35-40 area in EURSEK.
NOK – the strong oil prices and Norwegian short rates up at their highest level since 2014 doing all they can to support NOK, but EURNOK continues to languish in the range – can’t we at least get a test toward 9.50-40 here?
Upcoming Economic Calendar Highlights (all times GMT)
1215 – Canada Mar. Housing Starts
1400 – US Feb. Factory Orders
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