Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
EUR lower as Rome seeks EU confrontation
John J. Hardy
Chief Macro Strategist
Summary: The Italian government is at its most popular since forming as it keeps an aggressive line in confronting the EU and bond market constraints on the budget. Italian yields have jumped again and the euro is under pressure.
Italian yields gapped back higher this morning, with the two-year BTP well above 100 basis points again, driving fresh euro weakness with EURUSD ready to challenge the range low from a month ago near 1.1530 and the obvious big round 1.1500 level a bit lower. The populist Italian government is registering its highest approval ratings since its formation earlier this year and its aggressive stance on the budget is a chief driver, so Lega’s Salvini in particular feels that he has nothing to lose in continuing to drive a hard line on fiscal deficit expansion. The EU and bond market response will prove critical as the populists won’t back down.
Weak JPY
The yen is sharply weaker almost across the board as US yields have picked up again, and perhaps on a tepid quarterly Tankan survey and weak data out of China overnight. As well, hedging currency exposure to Japanese stocks may be a self-reinforcing driver as the Nikkei has blasted to new multi-decade highs over the last few sessions.
Firm GBP
While GBPUSD traders are eyeing the 1.3000 pivot area on USD strength, sterling is relatively firm against the euro despite the showdown in the Tory party during their party conference over the weekend. Boris Johnson continues to rail against anything resembling a Chequers deal, which PM May has apparently not abandoned. May is set to speak on Wednesday, but the odds of the Tory party delivering a Brexit are falling fast. Labour and some Tories won’t vote for a no deal and a Chequers-like deal would face even broader opposition. It is difficult to know the path from here, but some sort of extension of the Article 50 period together with a possible second referendum (highly risky) or even elections seems inevitable.
Strong CAD
The loonie ripped higher late Friday and to open the week as Canada signed on to the trade deal between the US and Mexico to replace NAFTA. USDCAD finds itself suddenly below the 200-day moving average and the move in that cross looks a bit exaggerated given the USD strength elsewhere, but this does help clear the way for the bank of Canada to play a bit of catchup with the Fed.
Chart: EURCAD weekly
Combining themes, the weak euro and the sharply stronger CAD have seen a blowout move in CAD crosses like EURCAD – the chart here has a bit of a head-and-shoulders look to it if the 1.50-1.4800 zone finally falls.
The G-10 rundown
USD – the USD enjoying strength on the euro’s and yen’s woes for now, but not convinced that USD strength is the focus at the moment, given the lack of a more forceful move in US rates.
EUR – the euro lower on fresh existential concerns. The single currency will remain headline prone and we have Italian finance minister Tria in Luxembourg today. If the EU makes nice, the euro could turn around quickly, but will they want to show that they can be pushed around?
JPY – USDJPY bulling up into the last shreds of the range back eighteen months or more ahead of 115.00, even without long US yields setting new highs for the cycle. The trend looks strong if the risk appetite mood stays relatively positive here.
GBP – sterling is bid against the euro. Watch out for stop-loss driven selling in sterling, however, if the USD strength drives GBPUSD through the pivotal 1.3000 level. As we discuss above, the UK political situation looks untenable for delivering a Brexit, so some sort of delay to the whole process, and a new narrative, looks increasingly likely.
CHF – extreme gyrations in EURCHF as Friday’s meltdown on fresh Italy woes reversed sharply ahead of the weekend. We were reminded over the weekend of the ongoing, awkward relationship between Switzerland and the EU, where a new deal is needed to replace the patchwork of deals that have accumulated over the years. Given Brexit, the EU is presenting a stern face here as well.
AUD – low expectations for the RBA tonight as Australian short rates have hit the skids over the last week. AUDUSD looks ready for new lows for the cycle if the 0.7200 area falls.
CAD – CAD pulling sharply stronger – look at EURCAD and even CADCHF and CADJPY – and more fuel in the tank there even as USDCAD's progress lower may prove a bit slow if the greenback firms further.
NZD - watching the kiwi’s relative strength versus the Aussie over the RBA tonight – in the bigger picture, we see more upside and than downside risk in AUDNZD.
SEK – tricky for SEK if the mood in Europe gets too negative as, but the medium-term picture suggests we have a well-defined top in place for EURSEK, encouraging a sell-the-rallies stance.
NOK – new highs in Brent – can the 9.40 area in EURNOK survive for long if crude continues higher – we focus lower toward 9.25.
Upcoming Economic Calendar Highlights (all times GMT)
• 0830 – UK Aug. Mortgage Approvals
• 0900 – Eurozone Aug. Unemployment Rate
• 1300 – US Fed’s Bostic (Voter) to speak
• 1330 – Canada Sep. Manufacturing PMI
• 1400 – US Sep. ISM Manufacturing
• 1615 – US Fed’s Rosengren (Non-voter) to speak
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...