Greek assets under pressure

Rates

On Monday, Bund trading largely resembled last week’s action. The eco calendar was empty apart from better Italian production data and flows remained thin. Since last Wednesday, the Bund flip-flopped in a 51-tick range between 158.93 and 159.44. The story was similar for the US Note future yesterday. Early weakness was erased in US dealings and bonds eventually eked out some gains. Towards the end of dealings, Fitch kept the US’s AAA rating.
They said that the US has achieved a rapid fiscal consolidation, but further deficit narrowing will be more difficult.

At the end of the day, the US yield curve bull flattened with yields 2.8 bps (2yr/5yr) to 0.6 bps (30-yr) lower. Changes on the Germany yield curve were marginal apart from an outperforming 30-yr yield (-2.4 bps). On intra-EMU bond markets, spreads added up to 7 bps. Greek markets were closed for orthodox Easter Monday, but in London trading spreads widened on a FAZ-report which painted a grim picture about the negotiations with the Institutions on the reform list. It could further weigh on Greek assets this morning, in combination with an FT-report saying that Greece is preparing for a default on May/June IMF repayments if it doesn’t get the final €7.2B aid tranche from the current bailout.

Today’s focal point: US retail sales

Today, the eco calendar heats up with the euro zone industrial production data, US retail sales, US NFIB small business confidence and US PPI inflation. After having increased for four consecutive months, euro zone industrial production dropped slightly at the start of the new year. For February however, the consensus is looking for a rebound by 0.4% M/M. Earlier released national data mostly showed a limited increase. In France and Germany however, the headline figure was depressed by weakness in construction activity, which is not included in the euro zone data. We believe therefore that the risks are for an upward surprise. In the US, it will be interesting to see whether retail sales finally rebounded following three consecutive monthly declines. The consensus is looking for an increase by 1.0% M/M in March, while the control group is forecast to show a more limited 0.5% M/M gain. Besides auto sales and gasoline station sales, other sectors are forecast to show modest increases in March, although weather conditions remained poor. Still, following the poor data of recent, we hope to see an upward surprise as also consumer confidence improved again recently. Also in the US, small business confidence is expected unchanged at 98.0, while PPI is forecast to show a limited increase in March. For small business confidence, we believe that the risks are for an upward surprise as smaller firms should feel less impact from the stronger US dollar.

Netherlands taps Jan2020 DSL; good demand expected

Today, the Dutch debt agency taps the on the run 5-yr DSL (0.25% Jan2020) for up to €3B. The bond didn’t cheapen in ASW spread terms going into the auction but trades relatively cheap on the Dutch curve which is supportive for demand. A Dutch €13B redemption this week should also boost the auction. Year-to-date, the Netherlands already completed more than 33% of this year’s expected funding need.

Today’s Strategy

Overnight, Asian equities trade mixed. The US Note future is marginally higher. The FT report on a possible Greek default (see above) is a negative for risk sentiment at the start of European trading, even if it was denied by a government official. It came at the heels of rumours that the Spanish popular Podemos parts want to have a debate on debt restructuring and can put the Bund immediately up for a test of the contract high.

Today’s eco calendar contains EMU IP, US retail sales and small business optimism. We don’t expect downward surprises, which could impact especially the US Treasury market in case of strong retail sales (lower US Treasuries). A break below 128-04+ is necessary to change the technical picture. Fed’s Kocherlakota (very dovish) is scheduled to speak again and the US earnings season heats up with results of Johnson & Johnson, JP Morgan, Wells Fargo and Intel. That could impact bond markets through equity sentiment.

The technical picture of the Bund remains bullish. In EMU, the focal point is Wednesday’s ECB meeting. We don’t expect big news but Draghi will likely strike a dovish tone. Of late, he emphasized that the ECB would complete its QE-programme as described. New highs for the Bund are likely in today’s/tomorrow’s context.