Rebound in stocks and yields (modestly) as geopolitical tension eases slightly. Volatilities are on the rise, especially on 30Y rates, be aware. Bund yield remains close to 1%, and treasuries remain near year lows. Eonia fixes at 1 bp. Sanctions may pull the Greek carpet. Keep expectations low.
Another day, another development, but nothing resembling closure. That goes for the conflicts in Ukraine, Gaza and Iraq alike. Some easing in the tension barometer as Russian military exercises near the Ukrainian border reportedly ended yesterday. Still, almost simultaneously, reports came from NATO deeming an armed Russian intervention as highly probable.
Euro stocks recorded increases of 1.9% (DAX), the highest increase in three weeks, and a band aid on the 10% loss from early July to early August. In the absence of real progress in any of the conflicts above and/or a pick-up in core data after the latest disappointments, sustainable gains are unlikely to be had.
That holds perhaps even more so on EUR yields. A modest rebound in the bund yield yesterday was mirrored by small increases in the long end of the swap curve, but e.g. the 30Y point still lies below 2%. While the 10Y point is the reference point on the govie curves given the current risk factors, the most interesting reference point on the swap curve is probably the very long end as that has the chance to self-sustain itself by hedging needs in the event of further sell-offs.
In the very short end of the EUR curve, Eonia swaps are again flirting with zero, driven in part by the fixing which now lies in just one basis point matching the global low seen on June 19th. The 3M swap lies in 5bps approaching the lows from June.
Implied vols are on the rise
Indeed, the prices of swaptions on 30Y underlying swaps have been boosted substantially over the past days. For instance, the 1M30Y quote has soared in excess of 20bpVols over the past few sessions and is rapidly approaching its 12 month high (from September 2013).
There’s no doubt that the collective need for receiving the long end of the curve is less now than it was in say May 2012, but as the front 10 years of the curve have reached a new all-time low, this has also pulled down the 30Y point below 2%, just 15bps above the global minimum in 2012. Getting this low makes covering fixed-rate policies for some life and pension firms a potentially dire affair, and may prompt further buying pressure, which in itself can drive rates even lower.
The upticks in the prices of options on 30Y tails should be seen in this context, and unlike most of 2013, the correlation between rates and vols is once again quite strongly negative.
Have low expectations for incoming EUR data
Late this week sees CPI and GDP data for the Eurozone. CPI is likely to be confirmed at 0.4 y/y for July while our q/q estimate for Q2 is for 0.0% growth/contraction. This is below consensus, though consensus seems to be moving from 0.2 to now 0.1% q/q.
Biggest business sectors in Greece hit hard by EU/Russia sanctions
The sanctions put up against and from Russia threaten to undermine Greek hopes of leaving the recession behind. According to Bloomberg, Russia is Greece’s largest trading partner and in addition the recent sanctions centered as they were on foods, hit the Greek exports hard. The tourism industry – another massive sector in Greece – is also likely to be hit. Indeed, estimates are that 200000 fewer Russian visitors will come in 2014 whereas the inflow from the Ukraine looks to be halved.
Immediate supply
Today the US is in the market with 4w bills and 3Y notes. Italy also to sell bills. Wednesday sees both Germany and the US in the market with 10Y notes (€4bn and $24bn respectively).
Nordea