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From the Floor: Storm looming for peripheral bonds — #SaxoStrats

   • Mounting inflationary pressures put European peripheral bonds under scrutiny
   • ECB defends QE but 'can't hold down' inflationary pressures — Fasdal
   • Equities continue to pull back ahead of nonfarm payrolls report
   • Dax could face '11,500 trigger' to the downside — Garnry
   • Market has got it badly wrong after Amazon share price falls — Garnry
   • US attack on Iran unlikely to hit exports despite geopolitical sabre-rattling — Hansen
   • Gold looks for close above $1,200/oz for fresh assault on $1,249/oz — Hansen

KBy Martin O'Rourke

Losing battle

The European Central Bank has been pretty consistent in its defence of quantitative easing this week and president Mario Draghi even pushed an integration agenda when he spokeThursday in the Slovenian capital of Ljubljana.

While that helped spark something of a rebound in European bonds, rising inflationary pressures through the global system are looking more and more likely to once again return the focus to the market and in particular to peripheral bonds.

Mounting inflationary pressures across the globe:
Source: Bloomberg

"There was a rebound in Italian bonds after a lot of selling in the last couple of weeks which came on the back of the ECB's defence of its QE policies and a warning not to be taken in by headline inflation figures and to focus instead on core inflation," says Simon Fasdal, Saxo Bank's head of fixed income.

"The problem is that markets still expect global inflationary pressures to rise and this is going to be an issue for European bonds and especially for peripheral bonds," he says. "It might be a bit too late for the ECB to change the sentiment and the overall view is to sell on strength in global bonds."

"Some of the most hit emerging-market economies are beginning to pick up," he said, filtering through to bonds and peripherals especially. "This can create turbulence down the road and the ECB cannot hold down this pressure."

"The fundamental factor is the divergence between US bonds and European bonds."

It's a different story for emerging-market bonds though, says Fasdal, which have staged a considerable recovery over the last three months.

"EM bonds have performed nicely in the last few months after the big breakdown on US yields," says Fasdal.

The nonfarm payrolls Friday for January is, as ever, a key trigger for the sector, he adds.

Emerging market bonds picking up nicely:

Source: Bloomberg

Nervous ride

Talking of nonfarm payrolls, it's a nervous ride for global equities ahead of the 1330 GMT report  retreating overnight in the US, S&P 500 excepted, and leading Asia to a slide as well. The latter was possibly induced by China's surprise decision to raise short-term interest rates 0.1% in an effort to curb leverage and boost China's yuan.

"11,500 is looking like a trigger level for Dax to the downside," warns Saxo Bank's head of equities strategy Peter Garnry. "In general, equity markets are treading water compressed into very narrow ranges on very low implied volatility."

Dax closed at 11,627 Thursday.

As earnings season unfolds, Garnry can't quite take in the market reaction to Amazon's fourth-quarter results after a slide in the share price.

"I'm still puzzled that so many people can get Amazon wrong and we've seen that again," he says. "If we get a pullback over the next couple of months we could get an opportunity here."

Garnry highlights the 38% rise in trailing cash flow as one piece of data corroborating his bullish stance on Amazon.

"Amazon's web service which is a growing part of the business is firing on all cylinders," he says. "It does a huge amount of investment and that has an impact on the accounting so you should just tune out all the noise that you hear on Amazon today."

Snapchat meanwhile has filed for an IPO with the intent of raising $3-4 billion on a market value of $25bn and an expectation of $1bn in 2017. "Keep in mind that all the new shares will be non-voting rights," says Garnry. "Around 92% is controlled by the directors."

Amazon fundamentals look good:


Watchful gold

Gold failed Thursday in an attempt to establish a base above $1,220/oz and the precious metal will have a close eye on the NFP this afternoon as its next catalyst.

"Gold failed to hold but if it can close above $1,220/oz, then that opens a route to $1,249/oz," says Saxo Bank's head of commodities strategy, Ole Hansen.

Silver's recent outperformance against gold might have reached a wall, adds Hansen, after the gold/silver ratio struck resistance at the 68.50 mark.

For oil, it's as we were with the sideways movements of the last two months continuing to prevail, even after US president Donald Trump launched a broadside at the Iran nuclear deal that put an end to sanctions against Tehran.

"US criticism is unlikely to stop Iran's ability to export," says Hansen, who sees resistance for US benchmark WTI at the $54.50-55/barrel mark.


Italian bonds likely to come under the cosh from inflationary pressures. Photo: Shutterstock

Martin O'Rourke is managing editor at Saxo Bank


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