DENMARK: White House Raises Stakes In Greenland Bid w/'Military Option' Comments
The prospect of Greenland coming under the control of the US appears increasingly feasible amid statements from Washington, D.C., both bellicose and negotiatory in nature. Speaking on 6 January, White House Press Secretary Karoline Leavitt said that President Donald Trump views securing Greenland as "vital to deter our adversaries in the Arctic region," and that the administration is "discussing a range of options to pursue this important foreign policy goal, and of course, utilising the US military is always an option at the commander in chief's disposal."
- However, the WSJ reports that during the course of a briefing to senior members of Congress on 5 Jan, Secretary of State Marco Rubio indicated "recent administration threats against Greenland didn’t signal an imminent invasion and that the goal is to buy the island from Denmark", with the apparent aim of scaring Copenhagen and Nuuk into a peaceful handover.
- Kuno Fencker, a member of the pro-independence Naleraq party in the Greenlandic parliament posts on social media, "I am almost certain now, and the rumours are now that the US is coming up with a Compact of Free Association offer, which is much better than the current self-government law."
- COFAs are currently in place between the US and several small Pacific island nations. These deals give the US military free access to operate in the country in question, duty-free trade, while the US would also provide basic social functions. This option would not see Greenland become a state of the US, or even a territory with the same status as Guam or Puerto Rico.
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EGBS: BTP/Bund Exhibiting Resilience Amid Ratchet Higher In EUR Rates Vol
The 10-year BTP/Bund spread has exhibited impressive resilience amid the latest uptick in EUR rates volatility. EUR 3m10y swaption vol is currently up 4.5bps on the session at a multi-week high of ~60bps, but BTP/Bund is only 1bp wider and is hovering just below the 70bp figure. Recent price action seemingly reflects BTP-positive themes that have been present throughout the year. That includes improving domestic fiscal fundamentals and more political stability in Italy compared to semi-core peers such as France.
- The 10-year BTP/Bund spread has narrowed almost 50bps this year. However, Italian paper still offers attractive carry given the context of an expected ramp-up of German fiscal spending/issuance from next year. While increases in rates vol tend to work against carry strategies such as BTP/Bund tighteners, it's worth remembering that 10-year EUR swaption vol remains close to multi-year lows.
- The seasonal increase in EGB supply at the start of next year may present a risk to further short-term narrowing in the spread, but we don't expect the 10-year segment of the curve to be tapped at Italy's (anticipated) January syndication. Additionally, any broader supply-induced widening may be faded if semi-core/peripheral sales are met with healthy demand.
Figure 1: 10-year BTP/Bund Spread Versus 3m10y EUR Swaption Vol (Source: Bloomberg Finance L.P.)
Figure 2: EUR Swaption Vol Since 2022 (Source: Bloomberg Finance L.P.)
OPTIONS: Larger FX Option Pipeline
- EUR/USD: Dec09 $1.1585-90(E1.7bln), $1.1760(E1.3bln); Dec10 $1.1580-81(E1.7bln), $1.1800(E1.7bln); Dec11 $1.1595-00(E3.0bln), $1.1610(E3.4bln), $1.1800(E1.7bln)
- AUD/USD: Dec09 $0.6330-35(A$1.2bln); Dec11 $0.6550(A$1.6bln)
- USD/CNY: Dec10 Cny7.1088($1.2bln)
US 10YR FUTURE TECHS: (H6) Approaching Key Support
- RES 4: 113-29+ High Oct 17 and a key resistance
- RES 3: 113-23 High Oct 23
- RES 2: 113-07/22+ High Dec 3 / High Nov 25
- RES 1: 112-30 20-day EMA
- PRICE: 112-12+ @ 11:09 GMT Dec 8
- SUP 1: 112-10+ Low Nov 20
- SUP 2: 112-07 Low Nov 5 and a key support
- SUP 3: 112-02+ Low Sep 25
- SUP 4: 112-00 Round number support
A bearish theme in Treasuries remains intact and today’s move down reinforces current bearish conditions. Price has recently traded through the 50-day EMA, at 112-26+. This undermines a recent bull theme and signals scope for a deeper retracement, with sights on 112-07, the Nov 5 high and a bear trigger. A reversal higher is required to once again refocus attention on the key resistance and bull trigger at 113-29+, the Oct 17 high.
