Julius Baer: Comentarios Euro-Dólar | Bonos US y Europa | Petróleo | Aluminio

Moisés Romero - Martes, 30 de Enero

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EUR/USD: Sentiment in the driving seat • We revise our three-month EUR/USD forecast up to 1.20. Little opposition from the European Central Bank (ECB) against a stronger euro allowed sentiment to drive the currency higher. • The US dollar interest rate advantage is currently vastly under-estimated, while alleged ‘weak dollar’ rhetoric appears overestimated.

 

The euro appears to be unstoppable, appreciating more than 3% since the start of the year. With this strong performance, our EUR/USD forecast held to date has become too extreme. Given last week’s lukewarm opposition from the ECB against a strong euro, we see much more limited downside for the currency in the coming three months. We thus revise our three-month forecast to EUR/USD 1.20. Nevertheless, we still expect the interest rate advantage of the US dollar to become the major driving force in the coming months. This should break down the support for the euro, which continues to be driven predominantly by sentiment. Economic data flow has recently boosted euro sentiment as the first reading for US Q4 2017 growth disappointed while economic data for the eurozone continued to meet high expectations.

The narrative that the US administration is increasingly focusing on more advantageous trade relations is also weighing on US dollar sentiment. While we acknowledge that the US administration is intensifying its protectionist stance, we doubt that outright verbal interventions in favour of a weaker USD will be part of this stance. We rather think that recent comments by Treasury Secretary Mnuchin, which acknowledged that a weaker US dollar supports US growth, were overstated. Looking further into the future, monetary policy and interest rate convergence is a much more convincing driver for exchange rates. Therefore, we expect EUR/USD to trade around the current level in 12 months following some unwinding of the record-high speculative euro long positions. We revise our one-year forecast to 1.24.

 

David Kohl, Chief Currency Strategist, Julius Baer

 

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Yields increase ahead of State of the Union

 

Exaggerated inflation expectations drove bond yields higher.

 

The yield of the benchmark 10-year Treasury note rose to 2.7% from 2.4% at the beginning of the year and 2.05% in September 2017. There are three theories cited in the bond market for the increase. First, it is argued that the US tax cuts will result in more inflationary pressure. Secondly, more and more market participants anticipate permanently higher oil prices. And last but not least, there is the argument that the weakening of the dollar functions as an additional stimulus to the US economy. At first glance, all the arguments seem convincing and explain why such large short positions have been built up in a market that drove prices down and yields up.

 

We do not share the bond market’s fears and maintain our call to add exposure to long-dated Treasury bonds on weakness. The tax reform could well add more than USD 100 billion to the US deficit this year, which will hardly push a USD 20 trillion economy into inflationary overdrive. We subscribe that there is room on the upside for US oil production and on the downside for the oil price. Fundamentally, we see no reason to change our view on the medium-term prospects for US bond yields. However, there could be volatility in the shorter term, should US President Trump call for an even weaker dollar in his State of the Union Address on Tuesday. Given that he has just introduced import tariffs on solar panels and washing machines, we cannot rule out that he will propose a weaker dollar to stimulate exports. A weakening of the dollar has the same positive impact on the economy as an interest rate cut. The closely followed financial condition index (FCI, see chart) shows that the dollar weakness in 2017 more than compensated for the three Federal Reserve (Fed) rate hikes, as the FCI actually ended the year stronger. As long as the core inflation rate remains below the Fed’s 2% target, however, the Fed will most likely adhere to its plot of three rate hikes.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

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European government bonds: German Bund yield back up

 

The yield of the 5-year and 10-year German government bonds rose to 0.0% and 0.7%, respectively, their highest levels since December 2015. They had been 0.3% and 1.2% when European Central (ECB) Bank President Mario Draghi mulled the idea of sovereign bond purchases in summer 2014, and they recorded a low of -0.6% and -0.2% in summer 2016 when the bond market perceived these purchases to become permanent. The strong increase of bond yields in recent days reflects two factors. First, Dutch Central Bank President Klaas Knot, the likeliest candidate to succeed current President Mario Draghi at the end of next year, openly voted for a rapid termination of the purchase programme. Moreover, today’s inflation figures for Germany and the sentiment indices for the eurozone are expected to signal an acceleration of both price pressure and growth, also arguing for a normalisation of the ECB’s monetary policy.

 

We have been negative for core European bonds for a long time but we stick to our view that Draghi will refrain from an early exit of the current purchase programme and that rates will only be lifted in 2019. That said, subordinated bonds of solid banks remain one of the few bright spots in the Eurozone bond market.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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Oil: Settling above 70?

 

• Oil continues to flirt with USD 70 per barrel. Growth optimism, the bullish mood and technical momentum support prices.

• We believe that today’s prices project too rosy a picture, stick to our cautious view and see the market at risk from profit-taking.

 

Oil continues to flirt with USD 70 per barrel and it remains to be seen if prices are able to lastingly settle above this much-watched level with the latest up move. Global growth optimism, the bullish market mood and technical momentum still provide robust sup-port. We still believe that prices above USD 60 per barrel project too rosy a fundamental picture. Indeed, the global oil market, and specifically US supplies, have been tightening faster than expected in recent months on the back of strong demand growth. Yet the tightening, as visible in US oil inventories, appears less driven by domestic factors than by international factors. Oil ex-ports have been a major contributor to the past months’ decline. Whether or not this oil has been consumed or is just being stock-piled, e.g. in China, is hard to tell. Our estimate of Chinese oil inventories points to a steep increase, partly driven by the country’s growing strategic reserves.

We believe the oil market’s tightening trend is set to slow and reverse. Output growth from US shale basins, Canadian oil sands and Brazilian deep water platforms should more than match projected global demand growth for the remainder of the year. US refinery runs seasonally soften over the coming weeks, which is an additional factor that should slow the recent declines of inventory levels in North America. Hedge fund and other investor calls on rising prices remain in unchartered territory and it is a question of when rather than if profit-taking will occur. But timing the turning points is hard. We stick to our cautious view and see profit-taking as a key risk going forward. The shale business should continue to expand drilling and completion activity as prices rise. Although the leading companies are committed to capital discipline, there is sufficient private equity capital chasing the shale boom.

 

Norbert Rücker, Head Macro & Commodity Research, Julius Baer

Carsten Menke, Commodities Research Analyst, Julius Baer

 

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Aluminium: All eyes on Trump

 

The focus of the aluminium market seems to have shifted away from China’s heating season capacity cuts to President Trump’s looming decision on aluminium trade. In April last year, he started an investigation into whether aluminium imports from China threatened the United States’ national security, for example, in regard to demand by the defence industry potentially not being met. Without being published, the results were sent to the President last week, starting a period of 90 days during which he has to decide on how to react to the findings. While the United States have been a net-importer of aluminium since the early 1990s, the market seems very convinced that the President will impose protectionist measures. London-traded aluminium remains close to its recent highs and the premium for physical delivery in the United States is up more than 10% since the start of the year. This strength is in contrast to the Chinese market where prices are down almost 15% from the recent highs. More than half way into the heating season, inventories in China are still on record-levels, prompting most markets to upwards revise their production estimates. Even the International Aluminium Institute had to acknowledge that China’s officially reported production was lower than its realised production. The discount between Shanghai and London-traded prices is the biggest in more than five years, signalling a two-tier market. Eventually, this should pull metal out of China, help balance the global market and weigh on prices. We see trading at the upper end of a fundamentally-justified range and remain cautious.

 

The aluminium market’s focus has shifted from China’s heating season capacity cuts to President Trump’s looming decision on trade. With London-trade prices close to recent highs and physical premiums rising, the market seems very convinced that protectionist measures will be imposed. We remain cautious on aluminium.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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