GILTS: Fiscal Continues To Garner Attention, UBS "Very Positive" UK Rates
Nov-06 09:56
Markets remain highly attentive to fiscal developments in the UK, with gilt risk premium reduced in recent weeks in the wake of the softer-than-expected CPI data and increased confidence in Chancellor Reeves’ ability to deliver a fiscally responsible Budget.
- When it comes to the Budget UBS suggest that “the total fiscal package may be as low as GBP20bln or as high as GBP40bln”.
- Their early estimate looks for the DMO to “borrow GBP8bln more in this fiscal year - a manageable figure thanks to strong funding progress so far”. They also suggest that “the long syndication in FY Q4 could still be cancelled and auction sizes remain steady”.
- Overall, UBS remain “very positive” when it comes to UK rates, expecting “disinflation to progress quickly”, while suggesting that “Budget risks look skewed toward a disinflationary impact (fiscal drag, and careful attention to potentially inflationary taxes and policy choices.)”.
- As a result, they recommend being long 30-Year gilts and target 3.05% in 1y1y SONIA.
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GERMAN AUCTION RESULTS: Disappointing Bobl Auction
Oct-07 09:49
- The 1.11x bid-to-cover achieved at today's auction of the 2.20% Oct-30 Bobl was the joint lowest at a Bobl auction since July 2021 (1.11x was also reached in July 2022). Bid-to-offer also very weak at 0.84x.
- Demand metrics were similarly weak for other parts of the German curve recently but this has been the first time this has filtered through to the extent seen today to the Bobl segment.
- The low price achieved at the auction (99.48) was above the secondary market mid-price right before the cutoff (99.467), at least.
- No discernible price impact of the weak results on the line, this is not untypical for German auctions.
OUTLOOK: Price Signal Summary - EUROSTOXX50 Futures Bull Cycle Still In Play
Oct-07 09:48
- In the equity space, a bull cycle in S&P E-Minis remains intact. The contract traded to a fresh cycle high last week to confirm a resumption of the uptrend and maintain the positive price sequence of higher highs and higher lows. Sights are on 6812.29, a 2.382 projection of the Aug 20 - 28 - Sep 2 price swing. Initial support to watch is at the 20-day EMA, at 6694.17. It has recently been pierced, a clear break of it would signal scope for a deeper pullback.
- EUROSTOXX 50 futures remain in a bull-mode condition. Last week’s gains resulted in a breach of key resistance at 5525.00, the Aug 22 high. The break confirms a resumption of the uptrend. The impulsive climb opens the 5700.00 handle next, with potential for a test of 5727.18 further out, a 1.236 projection of the Aug 1 - 22 - Sep 2 price swing. Initial firm support is 5525.00, Aug 22 high.
BOE: ILTR Usage Falls for First Time Since 3 June
Oct-07 09:47
- For the first time since 3 June, take up of the BOE's ILTR facility will be lower than the volume maturing from 6-months ago.
- Today's takeup will be GBP1.41bln lower than the amount due to roll off this week.
- It does, however, follow last week's strong take up of GBP5.085bln - the highest since the week the first Covid lockdown was announced.
- This follows last week's smaller STR usage which saw the biggest weekly fall (GBP6.565bln) in the facility's usage since 24 April - albeit this was unwinding a similar increase the prior week.
- This puts the total in the BOE's repo operations at GBP117.0bln, down from last week's GBP125.0bln - but still higher than the prior week's GBP113.9bln.
- The BOE likely won't be concerned, as week-to-week movements in response to different funding conditions are to be expected from these operations - and the flexible nature of these operations and high frequency (weekly) is designed to help market functioning.
