EGBS: Sharp Repricing In ECB Hike Expectations Drives More Curve Flattening
Mar-06 10:32
- The German curve has twist flattened, with Schatz yields up 4bps to 2.28% amid another sharp hawkish repricing in ECB rate expectations. ECB-dated OIS now price 23bps of hikes through year-end, with prospects for a near-term offramp in the Middle East conflict appearing increasingly limited.
- Reports on Iran’s intended use of newer missiles in the coming days and the FT report from Qatar suggesting Gulf energy exporters would shut down production within weeks have sparked the latest round of market volatility. Oil prices have spiked higher and have taken out yesterday’s highs, while equities are coming under renewed pressure.
- 10-year German yields are up 2bps to 2.86%, while 30-year yields are marginally lower at 3.42%.
- Theres been a meaningful extension of the flattening on the EUR 10s30s swaps curve, alongside a sell-off in long end German swap spreads & ASWs. This points to a continued unwind of crowded longs in the likes of EUR 10s30s steepeners and swap spread/ASW widener exposure (which were heavily favoured plays surrounding expectations re: the Dutch pension transition).
- Bund futures are -5 ticks at 127.13. Volumes have been extremely heavy through the week, with almost 700k lots having traded this morning alone.
- 10-year EGB spreads to Bunds are up to 2bps wider, with GGBs underperforming.
- In data, Eurozone Q4 final GDP was revised down to 0.2% Q/Q (vs 0.3% flash), largely owing to a revision in Ireland. Compensation per employee growth of 3.7% Y/Y was below the ECB’s 3.9% projection.
- A reminder that the US labour market report is due at 1330GMT. Meanwhile, ECB's Schnabel will speak at 1700GMT.
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FOREX: USDJPY Recovery Extends, Dovish Riksbank Minutes Weigh on SEK
Feb-04 10:31
- USDJPY continues to grind higher on Wednesday, extending the recovery from last week’s lows to 3%. The move back above the 50-day EMA, intersecting at 155.75, undermines the recent bear theme and highlights a stronger short-term bull cycle. Price action this morning has bridged the gap to initial resistance at 156.64, the 61.8% retracement of the Jan 14 - 27 bear leg, with 157.72 the next topside level of note.
- The swift recovery has been primarily driven by a more stable backdrop for the dollar following Kevin Warsh’s nomination, while expectations for the LDP securing a majority bring concerns surrounding Japan’s fiscal trajectory back to the fore. The firmer dollar has weighed on NZD (-0.45%) after mixed Q4 unemployment has failed to reignite bullish Kiwi momentum.
- USDCNY and USDCNH saw some buying interest in European trade, with both pairs edging to new session highs of 6.9425 and 6.9404 respectively - but we note no specific headlines behind the move. News that Putin is holding a videocall with Xi Jinping unlikely to be the driver here, but moves do follow the further strength in the CNY fix Wednesday: the 6.9533 fix was again the lowest since mid-2023 but still well above expectations (survey saw today's fix at 6.9363).
- Riksbank minutes are driving SEK underperformance. The debate amongst the Board over the next few months is clearly between holding the policy rate steady (the most likely scenario) and delivering another cut (only likely if both inflation and economic activity are weaker than expected). EURSEK has advanced 0.5% to 10.58, extending a moderate bounce from yesterday’s 10.50 cycle lows. The 20-day EMA intersects at 10.6336.
- Fed's cook is scheduled to speak on monetary policy and the economy later today, and ISM services highlights the data calendar today. Focus then turns to tomorrow's ECB and BoE decisions.
GILTS: Off Early Highs To Trade Little Changed, Bears In Technical Control
Feb-04 10:30
Gilts soften in recent trade, with Bunds away from highs ahead of German supply, countering the rally seen around the soft Spanish services PMI release.
- A modest downward revision to the final UK services PMI data had no tangible impact.
- Futures last -9 at 90.84 after filling yesterday’s gap lower during the early uptick.
- The bearish technical theme in the contract remains intact. Initial support and resistance of note located at last week’s low (90.48) and the 20-day EMA (91.35), respectively.
- Yields essentially flat on the day across the curve. 10s remain tethered to 4.50%.
- The ’25 closing high in 2s10s remains intact (81.63bp). The curve is less than 0.5bp off that level, a clean break above would expose the ’25 intraday high (84.58bp).
- Gilts ~2bp wider vs. Bunds this morning. A reminder that solid demand at yesterday’s gilt auction factored into outperformance for UK paper vs. Bunds on Tuesday.
- STIRs essentially flat, continuing to price around 1.5x BoE rate cuts for the remainder of the current cycle
- Our full preview of tomorrow’s BoE decision is available here.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA (bp) |
Feb-26 | 3.727 | +0.1 |
Mar-26 | 3.681 | -4.5 |
Apr-26 | 3.547 | -17.9 |
Jun-26 | 3.495 | -23.1 |
Jul-26 | 3.422 | -30.4 |
Sep-26 | 3.396 | -33.0 |
Nov-26 | 3.362 | -36.4 |
Dec-26 | 3.367 | -35.9 |
EURIBOR OPTIONS: More On The 98.625/99.00 Call Spread Trade
Feb-04 10:22
The recently covered 98.625/99.00 call spread play looks for 2.5-4.00x 25bp ECB rate cuts through September and is very low delta (3%). ERU6 trades 97.975 last, while ECB-dated OIS prices ~5bp of easing through Sep. Given the late-stage nature of the ECB’s cutting cycle (policy being deemed to be in “a good place”) and low delta of the position, we would suggest that is a hedge against an existing hawkish position in futures/elsewhere.
