Some great reports from the JP team here below.
The equity report needs some thoughtful comments. The FX is inconclusive as yet, imo. Participants are collecting again around the themes of a weaker euro and gbp vs the US$ .
Here some FX reports to start proceedings.
The fundamental case contra the euro rests on the ecb taking action on the 0.7% inflation reading which is 50 basis points higher than the 1.2% reading for the US. I would comment here that a low inflation rate is not a bearish signal for the currency in itself. Note euro bonds didn’t weaken in price as the euro fell. They increased in price as the spread to inflation widened! So we have different signals here from different instruments. The bonds moving higher indicating participants aren’t expecting much in the way of lower interest rates and transmission. And then lower currency indicating lower interest rates and or turmoil? Euro equity markets didn’t signal turmoil. Euro wise in my view i concur with the JP line above. “Impressive but inconclusive as yet”.
They are running their shorts vs the euro and rightly so. Its a trade but not a conviction trade as yet!
Now some additional comments on the other weak link here. The GBP.
Note, The UK’s inflation remains 150 basis points higher than the euro rate at 2.7%.UK gilt’s spread to French 10yr gilts is 50 basis points.
French 10 yr rates offer a positive 150 basis points to inflation whereas UK gilts off a negative yield of 10 basis points.
UK gilts remain at a zero spread to UST 10s yet the UST 10 yr offers a positive yield of 140 basis points.
Its plain to see that across much of the developed world government securities are being priced at a parr value of around 150 basis points positive yield to inflation. Only two countries offer a narrower spread.
Germany which offers a +90 basis points yield due to her strong and stable fiscal position and the UK which offers a -10 basis point yield because….?
In other words, in my view, there is therefore a lot of good will built into UK gilts at present which offer a negative interest rate. This presents a trading opportunity as the market is likely temporarily mis pricing UK gilts and sterling.
Of the two currency pairs to the us$ the gbp appears to offer more as a short due to these considerations. As the BOE this week released yet more liquidity into the GBP system via lowering collateral rules there is some evidence that the high relative inflation rate in the uk may extend further due to domestic policy actions.
Anyway, here the outstanding equity report with much detail. Its an excellent report and needs some time.
I’ll come back on this equity report as so much detail and specific cos worthy of comment and allocation potentially!
Have a great Sunday. I’m off to walk up a mountain, literally!
Rich