Are EU and US government yields set to recover?
Treasuries across the globe have in been in growing demand recently as investors are becoming increasingly worried about the monetary outlook on both side of the Atlantic. US yields have been moving within a downtrend channel since the beginning of the summer. US 10-year rate slid as much as 20bps, from 2.395% down to 2.20% as investors discounted a hawkish unwinding program for Janet Yellen. The 2-year rate fell 13bps to 1.30%. Similarly, Germany’s benchmark 10-year government bond yield lost 22bps to 0.40%, while the 2-year rate gave up 16bps and returned to -0.71%.
However, it seems that the rush for bonds is coming to an end as even the recent risk-off move failed to send yields lower. We are therefore ahead of a recovery in treasury yields, especially in the euro zone and the US. Given the fact that investors will most likely get rid of EU and US bonds at the same time, the effect on EUR/USD will be hard to predict. Nevertheless, the situation is quite different from that of commodity exporter countries such as Australia, New Zealand and Canada. Indeed, the spread has widened during the entire summer. A contraction of the interest rate differential would add incentive to sell those currencies as yield hungry investors reallocate their portfolios.
Still room to fade risk off trade
The current round of risky asset weakness and rise in volatility been partially blamed on Trumps decision to deploy additional troops into Afghanistan. In reaction to news of his announcement, the VIX spiked to a high of 16, US equities fought to sustain gains (clear weakness in Tech and Financial) while USDJPY slid to 108.60. While the speech provides a meaningful shift in campaign rhetoric the lack of details indicate investors should not assume long term structural consequence. Trump acknowledged that he had been critical of the unending war and advocated total withdrawal but as President his generals persuaded him to avoid creating a power vacuum in Afghanistan.
Some Washington pundits have suggested that this was Trumps attempt to stabilize a turbulent administration (following Bannon’s chaotic exit). However, we suspect that this stark reversal reflects Trumps lack of foreign policy experience and broader agenda. Elsewhere, suggestions that Trump pro-growth agenda is further of track, is a trade that has left the station months ago. In investment terms, our short-term view is the current risk-off trade as unjustified, opting to go long risk. We remain focused on Jackson Hole symposium in expectations that Yellen’s remarks indicating the markets are mispricing Fed-tightening risk.
Swiss trade balance widens
The Swiss trade balance has increased in July to 3.51 billion from 2.81 billion in June mostly due the continued decrease of imports growth that accelerated. The Franc overvaluation is pushing down the exports but the trade balance resists well and is still largely positive for July. Watch exports are one of the major exports driver with a growth of 3.6% y/y.
The CHF was down this morning against the single currency and is back towards 1.14 CHF for one euro. Markets did not react much on the trade balance data and focuses on the next ECB meeting the 7th of September. The summer is definitely quiet for Switzerland.
Upside pressures on the EURCHF should continue to happen before the European central bank meeting. Markets seem to buy the rumours. We stand ready to sell the news at the ECB meeting. One week later the September 14th the SNB will likely remains its rate unchanged
