Julius Baer: bonos gubernamentales Francia, India, Banco Central Méjico y paladio

Redacción - Viernes, 10 de Febrero

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FIXED INCOME French government bonds: Le Pen advisor raises the stakes for international investors The spread between French and German 10-year government bonds – widely seen as the best indicator for stress in the eurosystem – has narrowed yesterday despite adverse comments from David Rachine, head of strategy of presidential contender Marine Le Pen. Ra-chine explained to the Financial Times that he would convert some 80% of outstanding debt, in particular bonds governed by French law, into the new national currency when winning the election and leaving the eurosystem. All three conditions are unlikely to be achieved easily. First, Marine Le Pen is widely seen as losing the election. Second, leaving the EU and the eurozone requires a change to the French constitution which cannot be implemented by the president on its own. Third, redenomination of outstanding debt is a juridical challenge. We have seen in the case of Greek privately held government debt restructuring or in case of Banco Espirito Santo’s restructuring of subordinated debt that governments have influence over debt governed by local law – in both cases, debt governed by international law was not impaired. Yet converting its debt into national currency when the euro still exists would be treated as default by the leading rating agencies. As Marine Le Pen argues for an “intelligent protectionism” and a devaluation of the new currency, the re-denomination threat also comes up as an announcement for international investors to lose money.

 

The news flow from Marine Le Pen’s camp remains worrisome for international inves-tors. We still expect Le Pen to lose the election, but are aware that the French government bond market could remain volatile in the months ahead.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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India holds rates and shifts to a neutral monetary policy stance

 

The Reserve Bank of India (RBI) monetary policy committee kept its policy rate at 6.25% on Wednesday, and unexpectedly changed its monetary policy stance from accommodative to neutral, likely signalling the end of its easing cycle. The central bank expects growth to rebound sharply in FY 2018 following the slowdown from demonetisation, and cited concerns over rising global commodity prices and uncertainty from US economic policies. India’s growth in gross value added is projected to recover to 7.4% y/y in FY 2018 from a downward-revised 6.9% y/y in FY 2017 on a resurgence in discretionary consumer demand, pick-up in economic activity in cash-intensive sectors, and higher credit growth in view of lower interest rates. The central bank emphasised its commitment on inflation, targeting to bring inflation closer to 4% in a stable manner, with an emphasis on bringing down core inflation which has been sticky at 4.8%-4.9%, despite benchmark inflation falling to a two-year low of 3.41% in December. For FY 2018, inflation is forecast to reach 4.0%-4.5% in the first half of the year, and rise to 4.5%-5.0% in the second half. The RBI has kept its accommodative stance on liquidity, and said that there is more scope for banks to cut lending rates. Following the policy announcement, Indian government bond (IGB) yields rose and the yield curve bear steepened, while the INR has weakened slightly. The yield on the INR-denominated IGBs due September 2026 jumped by about 37bps from Wednesday’s open to 6.8019% as of 9 February. Although foreign holdings of INR-denominated IGBs and corporate bonds have fallen by INR390.8bn in the four months to January, the widening spread over US rates could attract overseas investors back to the Indian debt market.

 

The RBI could have used this window to cut rates given the potential growth slowdown from demonetisation. Instead, the central bank signalled a strong commitment to inflation and shifted its monetary policy stance to neutral, a first since December 2014. The loss in prices for IGBs reflects the unwinding of most investors’ positioning for a rate cut. We see the RBI’s actions as a major shift in policy and given higher US rates and rates volatility, we see further rate cuts as unlikely.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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Mexican Central Bank raises rates to 6.25%; short-term MXN bonds get more attractive

 

Last night, the Mexican Central Bank decided to raise interest rates by 50 basis points (bps) to 6.25% in response to the rising inflation, which reached 4.7% y/y in January 2017 as a result of higher domestic fuel prices and the weaker Mexican peso (MXN). There is room for further rate hikes in the medium term, in our view, depending on the evolution of the MXN. With inflation now above the central bank target of 3.00% (+/-1.0%), authorities are likely to be active, should further pressures arise. From a fixed income perspective, we think that short-term bonds denominated in MXN now look more attractive. For example, a two-year Mexican government bond in local currency now yields 6.7%, providing a substantial cushion against movements in the currency, while the duration of the bond is very low (1.7).

 

With inflation now above the central bank target, further hikes are likely should further price pressure arise. Short-term bonds denominated in MXN now look more attractive, yielding close to 7% while carrying relatively low duration risk.

 

Alejandro Hardziej, Fixed Income Analyst, Julius Baer

 

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COMMODITIES

 

Palladium: Unimpressed by drop in Chinese car sales

 

Yesterday provided further proof of the prevailing bullish sentiment in the palladium market. Prices remained broadly unchanged despite China reporting the steepest drop in car sales in five years. After becoming the world’s largest car market a few years ago, China has caught up with the United States as the world’s largest consumer of palladium in auto catalysts. January car sales were down almost 10% year-on-year, underpinning our view that consumers pulled forward purchases ahead of the increase in sales taxes but also resulting from fewer selling days due to earlier New Year holidays. How relevant the holiday impact was will only be known once February sales are reported. Another drop would likely challenge the bullish sentiment, trigger profit-taking and lead to a correction in palladium prices. Against this backdrop, we reiterate our cautious view and recommend staying on the side-lines for the time being. That said, we expect the slowdown in global car sales to be only temporary, with renewed growth supporting palladium’s medium- to longer-term favourable demand backdrop.

 

Palladium prices remained broadly unchanged despite a steep drop in Chinese car sales last month. Another drop this month would likely challenge the bullish sentiment, trigger profit-taking and lead to a correction in prices. We reiterate our cautious view and recommend staying on the sidelines for the time being.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

 

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