Julius Baer: Italia | Metales

Redacción - Jueves, 31 de Mayo

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Political crisis in Italy: Swing in euro sentiment amplifies The euro refused to follow the rules of gravity or interest rate differentials in the first months of this year. Euphoric sentiment is a powerful explanation for this temporary resistance of a currency to follow interest rate differences. With euphoria starting to weaken over the last couple of weeks, the euro has weakened as well. The escalation in the Italian political crisis has accelerated this sentiment swing, which has further room to go. Interest rate differentials alone suggest that EUR/USD could fall to levels around 1.11 in the shorter term. With a possible snap election in Italy being conducted in the next three months, we expect a further worsening of euro sentiment. With another rate hike by the US Federal Reserve (Fed) in June, we expect a further widening of the interest-rate differentials. We consequently adjust our 3-month EUR/USD forecast to 1.10 (previously 1.15). The rate advantage and current sentiment are much less important to our 12-month outlook where valuation is a more powerful driver. We continue to expect the euro to recover in 12 months and forecast EUR/USD at 1.23.

The political events in Italy have accelerated euro weakness, which is being driven by a large and rising rate disadvantage against the US dollar. We revise our 3-month EUR/USD forecast to 1.10.

 

David Kohl, Chief Currency Strategist, Julius Baer

 

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Italian government bonds: 10-year yield below the Treasury yield again

 

The government bonds of Italy managed a recovery yesterday as the bond market digested the possibility of a second attempt to form a coalition government. Moreover, market participants came to the conclusion that the yield movements had been excessive on Tuesday. The yield of the 10-year Italian government bond is back below the 3% level. Actually, it stands at 2.85% compared to 2.86% of the benchmark 10-year Treasury note. The risk of a downgrade of Italy’s sovereign credit rating is not off the table, and the political noise is going to stay with us for some time, so we leave the rating unchanged for now. The spread over 10-year German government bonds is down to 2.5%, compared to more than 3% on Tuesday but still up massively from the 1.2% registered a month ago. With regard to the German bond yield, the benefit of hindsight shows that the gains of the German Bunds were exaggerated by the tightness of the market. As we have outlined several times in the past, more than 90% of German government bonds are held by central banks. Hedging of derivative positions is thus mostly done with bonds borrowed from the central banks. In times of (perceived) market stress, such short positions are closed very rapidly, which can cause harsh price movements. We still regard German bond yields as too volatile to serve as a reliable benchmark going forward, and stay cautious on the EUR bond market in general.

 

We maintain our view that Italy will not leave the euro at any time soon, and the risk of a repetition of the European debt crisis of 2011/12 are remote. We also maintain our neutral position for subordinated bank debt.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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Aluminium and steel: Trump’s tariff-exemptions to end

 

While negotiations between the United States and the European Union continued over the past weeks, the two sides were unable to find a common ground in order to avoid the introduction of President Trump’s tariffs. The exemptions will end tomorrow, leading to import duties of 10% for aluminium and 25% for steel. From the European Union’s perspective, the target is not to set a precedence for further protectionist measures affecting much more important industries than aluminium and steel, which accounted for less than 2% of all exports to the United States last year. In case the tariffs are introduced, the European Union could file a complaint with the World Trade Organization, as other countries already did, although this will take time, and it could retaliate by imposing tariffs on US imports, which could increase trade tensions and renew fears of a trade war. The impact on the aluminium and steel markets should however be limited and is already reflected in prices. Aluminium costs around 15% more in the US than in Europe while steel is almost 60% more expensive, benefiting a small number of US producers but hurting a much bigger number of US manufacturers and consumers. Trade tariffs and barriers are inflationary domestically but deflationary globally as exporters are fighting for market share. Overall, we see the industrial metal markets well supplied and maintain a neutral view. While the global growth backdrop stays solid, the focus should be on China’s ‘old economy’, i.e. metals-intensive sectors such as infrastructure and property, where the outlook for demand is softening rather than strengthening.

 

Trade tensions could increase again after the United States and the European Union were unable to find a common ground on aluminium and steel. The impact on the aluminium and steel markets should be limited and is already reflected in prices. We see the industrial metal markets well supplied and maintain a neutral view.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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