- 1 UXy M8 @ 129.50 (closed) - 10 ED M9 @ 97.47 - there is just too little priced beyond june now. The drop in IK-BTS from 205 to 80 bps over 2 days is spectacular. It's touched zero in the fourth week of November 2011 - and then recovered, but other assets also looked a lot worrisome back then with FTSEMIB losing more than a third from its peak, german bund yields failing to act as a safe haven that week, EURCHF had been 15% down that year before SNB put the 1.20 floor. I don't see what another election will bring. Will they keep voting until Renzi and bunga bunga get enough votes for a coalition? If BTP market is right, then 1.07 EUR puts don't look that expensive at 11% IV.
rolls M8 -> U8: +4 RX @ -0.1 -1 IK @ -1.9 -1 6E @ 0.0083 -2 6E @ 0.0083 +1 NOK @ 0.00045 +1 6A @ 0.00045 -1 6N @ 0.00005 Political climate in NZ looks worrisome to me. Governor Orr's comments this week that answer to housing supply problems is relaxation of Kiwibuild LVR measures are comments of a political appointee. Launch of commission to examine sector-wide fair wage agreements seems like a huge step back in competitiveness. This and earlier flirting that the next move might as well be down create impression that RBNZ is very relaxed about incoming data, while RBA is still a believer in wage take-off. SYRIZA this week finally voiced their opinion how the surpluses in the incoming years should be divided between tax-breaks and handouts. It's really hard to believe that any Greek political party will survive until 2022 without touching those surpluses. Traditional economics would suggest that those surpluses aren't even sustainable as they are not primarily a result of tax collection improvements or strong economic growth but underdelivering on budgeted investments. I do not have any actionable ideas on this except timing popcorn purchases. In the bond market GGB 2019 looks depressed at 1% vs B composite so someone is having fun picking this extra yield. GGB 2019-2025 has increased from 220 to 320 bps on Italian stuff, 2025-2042 is still inside 95-120 bps range. Those yields look too low. I will try to run the budget numbers this weekend and see how much capacity they have to pay interest on all bonds they intend to issue.
flipped -1 6EU8 to +2 @ 1.1906. It seems that market pushed eur down on italian mess and didn't pay enough attention to praet's speech last week.
Q2: +4.16% with good SR. Got lucky to be positioned right for BTP sell-off. U8 -> Z8: +3 RX @ -2.49 -3 G @ -0.9 +7 UXY (+2, +5) @ -0.265625 -2 UB @ 0.28125
Australian 90-day bill IR’s are looking bit mispriced to me. Z8-M9 inverted from 10+ in H1 to -3 negative, so M9 can be shorted for positive roll-down. I suppose there was an element of –IBOR/OIS widening, but with Z8-M9 inverted it’s hard to argue that any hiking is still priced in. Data has not been supportive for RBA to be hawkish in the short run but it’s not that bad to reduce it to a 50% probability of a hike in just 2020H1 (M9-M0 of 14 bps). Data has been robust: - Average of all Australian PMI’s down to 52.5 from 55.5 average in 2018 - TD securities inflation going nowhere for 8 months from 2-2.1% yoy - Q2 core and services CPI weaker than in Q1 - Q2 wage growth going nowhere from around 2% yoy - Trade balance has been deteriorating until the last reading. - No Q2 gdp yet, though Q1 was good. - Building approvals, financing of new housing, house prices weakened significantly - On the other hand, secondary market financing is still okay. - AS51 doing good, big 4 stock prices not trashed - Biz confidence okay - Retail sales doing okay, around 2y average yoy - Infl expectations stable around 4% for a long time - Unemployment keeps going down, but still more than 1% away from 2008-lows (clear overheating level) - China had its stimulus, so like always could get higher ore demand. Political situation is a non-event. Both parties would spend money but the difference is how: private consumption via tax cuts or public consumption via higher spending. I suppose it’s the political developments that brought AUDNZD back to below 1.09. IMO it’s not gone up to reflect that the new governor of RBNZ is more dovish: - Wheeler didn’t flirt with idea of cutting rates. - Wheeler claimed that their stance would remain the same under dual mandate. - Orr has been explicit that rate cut is likely and talked that weak GDP would be a condition for that. - I see no significant data deterioration for RBNZ between Wheeler and now. - RBNZ seems to be more dovish now without change in fundamentals.