EUR/USD, GBP/USD, EUR/GBP Rates Strategy December 14
EUR/USD, GBP/USD, EUR/GBP Lloyd’s Bank Rates Strategy December 14
• EU summit to complete with no surprises in store
• EZ PMIs to set the tone for today’s session
• Seasonality points to GER underperformance
Final trading day of what was widely regarding as the final key week of 2012. And admittedly so as we have seen the much-anticipated FOMC announce $45bn of UST purchases (after operation Twist finished in end-December) and adopt quantitative measures in determining its monetary policy stance.
The Ecofin meeting announced the agreement on the Single Supervisory Mechanism (the first building block of the Banking Union) despite earlier disagreements on the coverage of the ECB, which opens the door for direct bank recapitalization from the ESM during 2013 (the legacy assets issue remains unresolved).
Then, the Eurogroup authorized the EFSF to release €49.1bn to Greece after agreeing that significant progress has been made since June (the date of the last disbursement to Greece) both in implementation level and the buyback procedure. Finally, the EU summit commenced yesterday and concludes today as the EU policy makers aim to finish the year on a high note. The first day included confirmation of the SSM launch and an agreement to establish the operational framework of SSM in H1-12 including a definition of legacy assets.
They are scheduled to reconvene at 8.15 GMT and schedule to finish shortly around midday with the respective press conference following suit. Putting everything together, we have seen significant progress especially in the Europe although the understanding is that the more ‘difficult’ discussions evolve around the next steps in the banking union agenda, namely the deposit insurance scheme and unified bank resolution plan. The EU council set a Jun-13 deadline for an agreement. This week’s developments caused a reaction but not to the magnitude seen by market participants.
Compared to Friday’s close, 10 year sector Gilts have been the underperformer as the effect from the Autumn statement has yet to fade. Treasuries sold off less as the optimism and pessimism switch places almost daily regarding the fiscal cliff negotiations while Bunds have benefited from the developments in Italy and despite the improved German data. Looking at the changes the start of December and comparing with our earlier seasonality analysis we find that Treasuries and Bunds have performed within the seasonality analysis findings.
At the 10 year sector, UST has sold off albeit at a greater extent (11.4bps) while Bunds have rallied by 3.3bps close to the average of 2.4bps identified by our seasonality methods. Gilts have countered so far the analysis and have sold off by 8.5bps in December.
Turning to core spreads and evidently the envisaged US-GER widening is confirmed up to now however the move, from a seasonality analysis looks stretched. The UK-GER has ignored the identified tightening (driven by Gilts selling off) while UK-US spread has tightened lass than anticipated. Going into year-end and with the fiscal cliff unresolved, based on the seasonality analysis we see significant possibility of 10 year GER underperforming vs. both UST and UK while the UK-US spread has potential to tighten further.
Back to today’s action and the data schedule is busy in both US and Euro area. However, as November CPI and Industrial production numbers are unlikely to impact market, the focus will be on Euro area preliminary PMIs.
Market expects a marginal improvement across the board however the indicators should remain in the sub-50 area (signalling contraction) with only the key German PMI Services seen at the 50 level – the highest point since Jul-12. An upside surprise would cause selling off pressures and ‘fight’ the usual Friday risk-off trend. Over the past 1 year, on Friday 5 year GER has seen lower yields on 32 out of 52 days.
Heffernan Capital Management
Business Development Director – Private Client Group,
3 Raffles Place #07-01
Bharat Building Singapore 048617
Tel: +65 6329 6408
Fax: +65 6329 9699
Shayne Heffernan Ph.D.
Economist/Hedge Fund Manager
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals. He is also an active consultant working with Corporations around the World.
He is recognized as one of the leading Economists in South East Asia, as well as the preeminent authority on ASEAN. His opinions and forecasts are widely read by decision makers in the region and Internationally.
Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.
Chinese Society of Economists
American Economic Society
Best Hedge Funds 2013
Working with some of the World’s largest financial institutions HCM’s goal is to provide portfolio returns that exceed the S&P 500 Index benchmark while …
UAE Economy Seeing a Spring Boom
Driven by stable high Crude Oil prices, tourism, diversification and a liberal trade policy, the United Arab Emirates (UAE) witnesses an unprecedented …
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 27.7778. This is …
The Hot List
Enviro-Serv Inc (OTCMKTS:EVSV), Medical Marijuana Inc (OTCMKTS:MJNA)
Enviro-Serv Inc (OTCMKTS:EVSV)
EVSV had a stellar dy yesterday, ut it looks like it is just the begining of big things, good …