Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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'Never-hike Draghi' slams the euro
John J. Hardy
Chief Macro Strategist
Summary: ECB president Mario Draghi will exit the stage later this year without ever having hiked interest rates during eight years at the helm of the ECB. Yesterday’s ECB meeting easily cleared the bar of dovish expectations and hit the euro across the board, sending EURUSD to new lows since mid-2017.
The European Central Bank meeting yesterday easily cleared the bar of dovish expectations, as TLTROs were announced now rather than later, the rate hike guidance was shifted over the horizon and most impressively, the ECB slashed growth and inflation forecasts for 2019, obviously impressed with the deceleration of the economic outlook in recent months.
Sovereign bonds across the EU (save for Greece) were heavily bid, most notably Italy’s BTPs where the 10-year yield dropped 12 basis points yesterday and Germany’s 10-year bund yield dropped 6 bps to its lowest level since 2016. It's interesting that risk assets across Europe, instead of rallying, actually sold off on the futility of the ECB’s move; a new TLTRO is a weak policy option that won’t drive growth and European banks stocks sold off heavily across Europe as yield curves flattened aggressively. The only policy options that will move the needle of growth for Europe from here will be fiscal.
In addition to the steep sell-off in the euro, the bout of weak risk sentiment was yesterday’s most notable development, sending equity markets, other risk assets and especially EM sharply lower and sovereign bonds sharply higher. This saw the JPY rising to the top of the heap, a development that could extend as we discuss with the USDJPY chart below.
Former UK Prime Minister Brown yesterday called for a long delay of a year to “consult the people” if the vote next week on May’s Brexit deal fails. I have kept a hopeful stance on sterling on the idea that we would reach some resolution fairly soon or have a sense of where this is going. But if a delay is the option, I fear it could turn into a rather long one and I am increasingly cautious on the sterling outlook if so – even if the path to a second referendum eventually opens up (but not until 2020?). Chiefly, this is due to the outlook for the global economy, where recession risks may do sterling few favors, as capital flows to fund the UK’s enormous still large current account deficit may be hard to come by.
Trading interest
Long USD: taking profit on EURUSD put options, retaining spot shorts with stops moved down to 1.1280 – targeting 1.1000 area or however far we can get ahead of FOMC. AUDUSD staying short for a significant move below 0.7000.
EURJPY short – maintaining shorts and adding on upticks with stops above 126.00
Chart: USDJPY
USJPY is at an interesting technical pivot here – back down through the 200-day moving average and the prior range highs around 111.25. This pair could offer the most beta to any significant surprise over US data – especially negative surprises that boost US treasuries and further weaken risk sentiment – the action could be even more brutal in other JPY crosses, as the USD tends to keep a relatively even keel elsewhere when general risk deleveraging is afoot.
Sovereign bonds across the EU (save for Greece) were heavily bid, most notably Italy’s BTPs where the 10-year yield dropped 12 basis points yesterday and Germany’s 10-year bund yield dropped 6 bps to its lowest level since 2016. It's interesting that risk assets across Europe, instead of rallying, actually sold off on the futility of the ECB’s move; a new TLTRO is a weak policy option that won’t drive growth and European banks stocks sold off heavily across Europe as yield curves flattened aggressively. The only policy options that will move the needle of growth for Europe from here will be fiscal.
In addition to the steep sell-off in the euro, the bout of weak risk sentiment was yesterday’s most notable development, sending equity markets, other risk assets and especially EM sharply lower and sovereign bonds sharply higher. This saw the JPY rising to the top of the heap, a development that could extend as we discuss with the USDJPY chart below.
Former UK Prime Minister Brown yesterday called for a long delay of a year to “consult the people” if the vote next week on May’s Brexit deal fails. I have kept a hopeful stance on sterling on the idea that we would reach some resolution fairly soon or have a sense of where this is going. But if a delay is the option, I fear it could turn into a rather long one and I am increasingly cautious on the sterling outlook if so – even if the path to a second referendum eventually opens up (but not until 2020?). Chiefly, this is due to the outlook for the global economy, where recession risks may do sterling few favors, as capital flows to fund the UK’s enormous still large current account deficit may be hard to come by.
Trading interest
Long USD: taking profit on EURUSD put options, retaining spot shorts with stops moved down to 1.1280 – targeting 1.1000 area or however far we can get ahead of FOMC. AUDUSD staying short for a significant move below 0.7000.
EURJPY short – maintaining shorts and adding on upticks with stops above 126.00
Chart: USDJPY
USJPY is at an interesting technical pivot here – back down through the 200-day moving average and the prior range highs around 111.25. This pair could offer the most beta to any significant surprise over US data – especially negative surprises that boost US treasuries and further weaken risk sentiment – the action could be even more brutal in other JPY crosses, as the USD tends to keep a relatively even keel elsewhere when general risk deleveraging is afoot.
The G-10 rundown
USD – It's important for broad USD sentiment that the EURUSD break lower hold. Elsewhere, USD strength is an easier prospect as less liquid DM and EM currencies are offered amidst weak risk sentiment. As for today’s US jobs report, in-line to strong numbers may be looked through, while exceptionally weak payrolls numbers and/or a disappointment on the earnings front could see notable USDJPY selling.
EUR – EURUSD poked to new lows and the question in coming days will be whether Trump’s tweets and anticipation of a further dovish shift at the March 20 Federal Open Market Committee meeting will prevent further progress lower. EUR weakness against JPY was even more pronounced yesterday – more to come there if risk sentiment deteriorates further.
JPY – the yen is the king of the mountain as the shift in risk sentiment sees the unwind of carry trades in EM/JPY et cetera. A deepening of this ugly backdrop could lead to at least an echo of the big JPY cross meltdown we saw at the beginning of the year.
GBP – sterling thriving against the euro, but what happens next week will be pivotal. We have been generally hopeful for sterling strength, but weak risk sentiment is not particularly helpful and if we don’t get a deal next week, a delay scenario could risk turning into a long delay scenario that leaves sterling twisting in the wind on the extension of uncertainty.
CHF – thriving on the weak risk sentiment and the ECB’s dovish turn – not much room for takeoff if the Swiss National Bank is going to defend the 1.1200 area.
AUD – the AUDUSD hanging in there above 0.7000, but for how long? Let’s see how the USD reacts over today’s jobs report, but the key test will be whatever emerges from US-China trade talks.
CAD – more upside range to work with in USDCAD and I expect the full extent of that range to be explored as long as we see this ugly backdrop. We will see an interesting test of this pair specifically today as both the US and Canada report their latest jobs numbers and Canada’s erratic employment change series is coming off a massive positive spike in January.
NZD – kiwi holding out against the US dollar in these market conditions is a near miracle and must be based on some combination of a hope that China will maintain its strong yuan policy and that something positive emerges from the US-China trade talks.
SEK – we were constructive on SEK rally potential but yesterday’s move shows that SEK is still highly sensitive to weak risk sentiment and the “low forever” ECB frustrates the idea that the Riksbank can ever really normalise. 10.729 was the post-GFC high in EURSEK and next Tuesday’s Sweden CPI is the next key event risk for SEK.
NOK – important risk events up for Norway early next week with Monday’s CPI and Tuesday’s Regions Survey. EURNOK resistance below 9.85 not holding this morning and a break and hold above risks setting in motion a bigger squeeze. Key two or three sessions dead ahead.
Upcoming Economic Calendar Highlights (all times GMT)
13:15 – Canada Housing Starts
13:30 – Canada Feb. Unemployment Rate / Net Change in Employment
13:30 – US Feb. Housing Starts & Building Permits
13:30 – US Feb. Unemployment Rate
13:30 – US Feb. Change in Nonfarm Payrolls
13:30 – US Feb. Average Hourly Earnings
Saturday: Powell Speech, Q&A
Sunday: Powell interview on 60 minutes TV show
USD – It's important for broad USD sentiment that the EURUSD break lower hold. Elsewhere, USD strength is an easier prospect as less liquid DM and EM currencies are offered amidst weak risk sentiment. As for today’s US jobs report, in-line to strong numbers may be looked through, while exceptionally weak payrolls numbers and/or a disappointment on the earnings front could see notable USDJPY selling.
EUR – EURUSD poked to new lows and the question in coming days will be whether Trump’s tweets and anticipation of a further dovish shift at the March 20 Federal Open Market Committee meeting will prevent further progress lower. EUR weakness against JPY was even more pronounced yesterday – more to come there if risk sentiment deteriorates further.
JPY – the yen is the king of the mountain as the shift in risk sentiment sees the unwind of carry trades in EM/JPY et cetera. A deepening of this ugly backdrop could lead to at least an echo of the big JPY cross meltdown we saw at the beginning of the year.
GBP – sterling thriving against the euro, but what happens next week will be pivotal. We have been generally hopeful for sterling strength, but weak risk sentiment is not particularly helpful and if we don’t get a deal next week, a delay scenario could risk turning into a long delay scenario that leaves sterling twisting in the wind on the extension of uncertainty.
CHF – thriving on the weak risk sentiment and the ECB’s dovish turn – not much room for takeoff if the Swiss National Bank is going to defend the 1.1200 area.
AUD – the AUDUSD hanging in there above 0.7000, but for how long? Let’s see how the USD reacts over today’s jobs report, but the key test will be whatever emerges from US-China trade talks.
CAD – more upside range to work with in USDCAD and I expect the full extent of that range to be explored as long as we see this ugly backdrop. We will see an interesting test of this pair specifically today as both the US and Canada report their latest jobs numbers and Canada’s erratic employment change series is coming off a massive positive spike in January.
NZD – kiwi holding out against the US dollar in these market conditions is a near miracle and must be based on some combination of a hope that China will maintain its strong yuan policy and that something positive emerges from the US-China trade talks.
SEK – we were constructive on SEK rally potential but yesterday’s move shows that SEK is still highly sensitive to weak risk sentiment and the “low forever” ECB frustrates the idea that the Riksbank can ever really normalise. 10.729 was the post-GFC high in EURSEK and next Tuesday’s Sweden CPI is the next key event risk for SEK.
NOK – important risk events up for Norway early next week with Monday’s CPI and Tuesday’s Regions Survey. EURNOK resistance below 9.85 not holding this morning and a break and hold above risks setting in motion a bigger squeeze. Key two or three sessions dead ahead.
Upcoming Economic Calendar Highlights (all times GMT)
13:15 – Canada Housing Starts
13:30 – Canada Feb. Unemployment Rate / Net Change in Employment
13:30 – US Feb. Housing Starts & Building Permits
13:30 – US Feb. Unemployment Rate
13:30 – US Feb. Change in Nonfarm Payrolls
13:30 – US Feb. Average Hourly Earnings
Saturday: Powell Speech, Q&A
Sunday: Powell interview on 60 minutes TV show
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