FIXED INCOME: Greece unlikely to rattle the boat for European government bonds

Julius Baer - Lunes, 26 de Enero

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The Greek elections yielded the expected result. The left-wing Syriza party has become the largest party and thus benefits from a 50-seat bonus in the 300-seat Greek parliament. Nevertheless, with 149 seats, Syriza has missed the simple majority by the smallest possible margin. Syriza’s leader Tsipras must thus seek a coalition partner, which could take some time.

 

Tsipras is likely to immediately ask the troika – the European Central Bank, the EU Commission and the International Monetary Fund – to renegotiate the terms of the emergency loans. Moreover, the new government is likely to seek a restructuring of the government debt held by the European System of Central Banks. Such a negotiation will not pass without disruptions and threats from all sides. We do not assume, however, that it will destabilise the European government bond market in a material way. The market is still counting on the national central banks to massively bid for government bonds in the months ahead, which will keep yields at levels that we regard as unattractive for private investors.

 

The search for yield will continue in the EUR market. As corporate bond yields are already at depressed levels, we see more value in real estate-related investments or USD high-grade bonds than in EUR bonds.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

COMMODITIES - Elusive impact of Greek elections on gold, further weakness in copper

The strength in gold prices draws attention. We still believe the past week’s upmove is primarily momentum driven and not the result of a pickup in safe-haven flows, similar to the temporary rally seen roughly a year ago. Helped by expectations about quantitative easing in the eurozone, the net length in futures positions held by investors has increased to the most bullish levels in over three years, which seems to confirm the strength in sentiment as a key driver.

 

The bullish sentiment on the futures market has started to spill over to physical investment demand given the recent inflows into physically backed products. The Greek election’s impact on the gold market is elusive with the outcome being within expectations. Elsewhere, copper prices continue to slide likely on concerns about Chinese demand as the simultaneous softness of the renminbi implies. Drilling activity slows rapidly in North America as the latest rig count statistics illustrate.

 

We believe that oil prices should stabilise and rebound in the near term due to slowing production growth and strengthening oil demand. Last but not least, soybean prices declined on fading export demand and shipment cancellations. Brazil is set to harvest a bumper crop over the coming weeks which should add to the global oversupply. On the back of the recent price weakness we move our short soybeans recommendation to Hold.

 

The impact from Greek elections remains elusive. The momentum-driven gold rally might persist in the near term but the longer-term outlook remains bearish.

 

Norbert Ruecker, Head Commodities Research, Julius Baer.

 

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