Weekly Bond Update: Buckle up for intense activity ahead
- Key month ahead for central banks and Brexit referendum on June 23
- Brexit polls generally favour 'Remain', but latest poll points to a 'Leave' verdict
- June chance for Fed rate hike still looks unlikely given volatility ahead
By Michael Boye
The summer period is traditionally one of calm holiday atmosphere in financial markets, due to the slow news flow and investors prioritizing sunbeds over stock charts. This year you might want to postpone your holiday plans though, as June could present some historic and (at least in the financial world) earth shattering events.
In Europe, where the ECB’s corporate sector purchase programme (CSPP) will commence this week and we will hear from the ECB itself on Thursday, very much is made of the Brexit decision on June 23 - which you can follow closely right here.
At the moment though, this decision from the British electorate, which has the potential to permanently refurbish the political and economic landscape in Europe, looks like a comfortable win for the remain camp, notwithstanding the latest poll from The Guardian that has a 52-48 move in favour of leaving the union. The biggest market mover could thus instead turn out to be the Federal Open Market Committee meeting on June 15.
Here, the Federal Reserve members will have to walk the talk of recent hawkish rhetoric, which has indicated an increased chance of an imminent rate hike in the US. Despite a 30% chance at the moment, we think the June meeting will stay clear, given its close collision with the Brexit vote.
Later on, it will be the Spanish electorate, which will be heard in General Elections on June 26, where the Catalonian minority is sure to take advantage of the spotlight to voice its long known independency call once again.
The uncertainty of all of the above did manage to create some volatility in the past month, especially in emerging markets, which in general, left our #SaxoStrats trade views little changed to slightly softer, following a streak of very strong performance lately.
During the month, we substituted between bonds in our view on Thomas Cook, which warned about slowing sales due to terror threat, but also initiated bond buy backs. This forced the 2020 bond, our initial trade view, to be priced very tightly back for an early call, in turn prompting us to switch to the longer dated 2021 bond, which can’t be called before 2018.
Among the better performers, we noted completed comebacks for both Banco do Brasil and Stena, which have now erased losses after strong sentiment change in Brazil due to the government change and a rebound in oil prices respectively.
Read much more about portfolio performance in May and updated trading views inside the #SaxoStrats Corporate bonds presentation for June 2016.
— Edited by Martin O'Rourke
Michael Boye is is a fixed income trader at Saxo Bank