BOND SUMMARY: EGB/Gilt: Bull Flattening
Mar-18 11:40
European government bonds have rallied this morning with gilts outperforming and regional equities selling off.
- Having yesterday referred to President Putin as a 'murderous dictator' and a 'pure thug', US President Biden will reportedly warn China's President Xi not to actively support Russia. This marks a hardening of the US' position and will further weigh on bilateral relations with Moscow and Beijing.
- Gilts have traded higher with the curve bull steepening as repricing of the BoE policy meeting following yesterday's relatively dovish hike compounds the impact of geopolitical risk concerns. Yields are now down 5-10bp on the day.
- Bunds have underperformed gilts, albeit with the curve similarly bull steepening. The 2s30s spread has narrowed 3bp.
- The short end of the OAT curve has similarly underperformed. Cash yields are 1-3bp lower on the day.
- BTPs have marginally outperformed core EGBs at the short end. Yields across the curve are 1-4bp lower.
- Supply this morning came from the UK (UKTBs, GBPbn).
- There were no tier one European data releases this morning.
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CROSS ASSET: Price Signal Summary - Equities Remain Vulnerable Despite Bounce
Feb-16 11:37
- In the equity space, S&P E-minis remains vulnerable despite Tuesday’s gains. The contract recently failed to hold above the 50-day EMA - at 4549.15. This average represents a firm resistance and a clear break would suggest scope for a stronger rally towards 4671.75 initially, Jan 18 high. EUROSTOXX 50 futures remain vulnerable. Last week, the contract failed to hold above the 50-day EMA - at 4188.70. This average still represents a key resistance point where a clear break would suggest scope for a stronger recovery and open 4324.50, Jan 13 high.
- In FX, EURUSD is recovering for a second session, narrowing the gap with next resistance at the Feb11 high of 1.1401. EURJPY has extended the bounce off recent lows, chewing further through the downtick posted on Friday. The bull trigger remains at 133.15, Feb 10 high, meaning rallies will target this level before shifting sights to 133.48 and above.
- The Gold rally paused Tuesday, with prices drifting. Nonetheless, the recent clearance of resistance at $1853.9, the Jan 25 high reinforces the underlying bullish condition. The recent rally in WTI futures petered out on Tuesday. Nonetheless, the recent break higher resumed the bullish price sequence of higher highs and higher lows. Note too that corrections remain shallow and this both highlights and reinforces underlying bullish sentiment.
- Bund futures are trading near its recent lows and remain in a clear downtrend. Moving average conditions are in a bear mode set-up too, highlighting current sentiment. The focus is on the 164.00 handle next. The trend condition in Gilt futures is unchanged and remains bearish. With the 120.00 psychological handle cleared, the focus is on 119.28 next, a Fibonacci projection.
BOND SUMMARY: EGB/Gilt: Broad Gains
Feb-16 11:35
European government bonds have traded firmer this morning while equities are close to flat on the day.
- Despite potential signs of a marginal de-escalation in the Ukraine crisis yesterday, indications that Russian troop levels could be rising on the border reflect the still heightened degree of uncertainty over the direction of the conflict.
- UK inflation came in above expectations for January (5.5% Y/Y vs 5.4% survey).
- The gilt curve has twist steepened. Yields at the shorter end are 4-5bp lower on the day, while pushing up 2bp at the longer end. The 2s30s spread is 7bp wider.
- Bunds started the session on a weak footing before making gains through the morning and now trading marginally above yesterday's close.
- OATs have performed in a similar fashion with the curve 1bp steeper.
- BTPs recovered earlier losses to now trade close to flat on the day.
- Supply this morning came from Germany (Bund, EUR3.273bn allotted), Portugal (BTs, EUR1.25bn) and the Eurozone (EU Bills, EUR1.991bn). In addition, syndicated auctions were held for the ESM (0% Dec-26, books last seen above EUR37bn) and Slovenia (2.25% Mar-32 SLOREP tap, books above EUR900mn & 0.4875% Oct-50 SLOREP, books above EUR1.1bn).
- Italy bought back a combined EUR2.231bn of BTP/CTZ/CCTeu.
GERMANY: SPD Leads In Saarland Polls In Test Of Scholz's Popularity
Feb-16 11:33
The next German state election takes place in the smallest non-city state, Saarland, on 27 March. This will be the first German state election to take place since the September 2021 federal election. As such, the election will undoubtedly be used to gauge public support for the federal gov't, even if the majority of ballots will be cast by voters focusing on local issues.
- Infratest dimap poll: SPD: 38% (+5), CDU: 29% (+1), AfD: 8% (-1), FDP: 6% (-2), Greens: 6% (-2), Die Linke: 5% (-1), Others: 8% (=). Fieldwork: 8-12 Feb 22, Chgs w/ 24 Nov 21. 1,175 respondents.
- At present the CDU lead the state gov't in a 'grand coalition' with the SPD as the junior partner. Based on recent polling the current gov't could be re-formed easily, but with the SPD and CDU reversing the senior and junior roles.
- Depending on the vote shares on 27 March there could also be the potential for a centre-left 'traffic light' coalition of the SPD, Greens and FDP, mirroring that at the federal level, or a leftist 'R2G' of the SPD, Greens, and Die Linke.
- There is a 5% threshold for winning seats in the regional Landtag, meaning the FDP, Greens, and Die Linke could all miss out should their voters not turn out in sufficient numbers. The Greens have historically struggled for support in the Saarland, given its history as a centre of German coal mining.
