HYBRIDS: Hybrid Movers: VW

SX7E (18th July) 195/180ps, bought for 3.35 in 4.66k.

Late on Friday Goldman Sachs noted that “the ongoing conflict in the Middle East has shifted the distribution of risks for oil which has pulled both the pricing of oil and breakeven rates higher. Given these risks, we estimate rate sensitivities to supply shocks to determine the potential impact on European yields”.

• They find that a “$10 shock to oil prices driven by supply concerns - such as geopolitical risks - raises EUR 10-Year OIS yields by up to 10bps after three weeks and steepens the curve. In contrast, the effect of a demand-driven oil shock is about twice as large. Translating these sensitivities to our upside risk scenario of $90/bbl implies an upside impulse to core rates of around 10bps, and a steeper curve, pushing in the direction of our Bund yield forecasts”.

In the latest blow to the already ill-fated NATO summit taking place on 24-25 June, the Japanese Foreign Ministry has confirmed earlier headlines reporting that PM Shigeru Ishiba may not attend the summit. The expected cancellation of the IP-4 (Indo-Pacific Four: Australia, Japan, South Korea and New Zealand) meeting with US President Donald Trump has already seen South Korean President Moon Jae-in and Australian PM Anthony Albanese pull out of the event. 

• Japan's Foreign Minister Takeshi Iwaya will instead represent Tokyo at the summit.
• For Ishiba, the withdrawal from the NATO summit comes at a time of significant domestic political pressure. On 22 June, his conservative Liberal Democratic Party (LDP) suffered its worst-ever return in elections to Tokyo's Metropolitan Assembly. The LDP fell out of first place, winning 22 of the 127 seats available, below the previous nadir of 23 seats in 2017.
• The minority LDP-Komeito gov't faces a nationwide electoral test in July, with the upper chamber of the National Diet, the House of Councillors, holding elections in late July.
• The LDP-Kometio coalition currently holds a majority in the upper chamber, but significant losses could wipe this out, giving significant bargaining power to minor parties. Worse than expected results could even force Ishiba's resignation/lead to an internal leadership challenge.