June 26, 2017 - Market Update (Low yields to pressure US banks, Italian tax payers taking EUR 17 bln bill, FX options - implied vols making lows, VIX at 10, Fed to keep hiking, EUR longs trimmed)

Short recap

Asia up

Europe opening higher

Trump ok to cooperate with Senate on healthcare bill

Mester/Williams to keep hiking

Goldman Sachs sees 25% probability of a recession in US over the next 2 years

BIS was out with very positive annual report saying global growth to reach long-term average levels

Sees high risk of still growing debt level due to low rate environment and productivity growth

Arguing central banks should normalise their policies. More  link

FX options – implied vols making new lows

Similar picture in VIX, trading around 10 level

Equities

Pre-earnings – investors looking forward to see strong earnings in order they feel comfortable with current market valuation (highest since 2004)

Low yields to bite US banks, may see the pressure this week in case of risk off

As the valuations of US banks need to reprise given the low yields

Takata filling for bankruptcy after worldwide airbag recalls

Chinese bank regulator pushing banks to implement reforms

Intesa Sanpaolo to receive assets, senior bonds from two failed Italian regional banks

Gov to cover EUR 17 bln hole, subordinated debt holders to take the hit

Nestle having a new shareholder (Third Point) that pushes for squeezing more juice out of the company for shareholders

Looks like GE’s acquisition of Alstom’s power biz is paying off with a new contract for power plant supplies in Romania

IT companies like Cisco, IBM or SAP are pushed by Russia to share cyber security info

Bonds

10-yr Trys yield at 2.15% - not much movement

10-yr Bund yield at 0.25% - despite the mess with banks in Italy, the IT-GE yield spread stable after huge drop in June

The hit subordinated bond holders took in IT can spread around within this space in EZ

EURUSD

COT report as of Tuesday last week:

EUR longs 45k vs 79k previously - after the highest since 2007, EUR long specs trimmed positions

US yields to set the direction today

Range 1.1100-1.1300 this week likely

Support at 1.1187 (23.6% Fibo)

Trading above 10 DMA at 1.1176

Just out of curiosity Morgan Stanley was out with 'Strategic FX Portfolio Trade Recommendations' – Limit order from May 18:

Entry: 1.1030

Target: 1.1800

Stop: 1.0800

The rationale:

“We expect the USD to rally modestly against EUR as the market reprices its Fed expectations. We would use that rally in the USD to sell vs the EUR.

Increased signs of pro-integration pressures emerging in Europe (eg. Macron, Portugal - Fitch upgraded outlook from stable to positive ... improvement in the periphery)

Stronger growth environment should bring inflows into the equity market. The risk to this trade is a slowdown in equity market”.

Data/Events

Fed’s Williams

ECB’s Draghi (1730 GMT)

Tue

ECB’s Draghi (0800 GMT)

Fed’s Williams (0805 GMT)

BoE’s Carney (1000 GMT)

Fed’s Harker (1515 GMT)

Fed’s Yellen (1700 GMT)

Fed’s Kashkari (2130 GMT)

Wed

Fed’s Williams (0730 GMT)

Central bankers meeting in Portugal (1330 GMT):

ECB’s Draghi, Constancio, Mersch

BoE’s Carney

BoJ’s Kuroda

BoC’s Poloz

Thu

Fed’s Bullard (1700 GMT) 

Should you have any questions feel free to contact me anytime.

Good luck Champs!

Mr Hawk

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