Hello 'Schatz'

The Day So Far

So the second reading of UK GDP showed the economy was boosted by a strong performance in the manufacturing sector towards the end of last year resulting in a minor beat in the Q/Q reading. However, it was noted by the ONS that there was a slowdown in business investment over that period. It is this latter detail that I think is more telling and looking at the movement in Cable this morning the data has done very little to help the fortunes of GBP on an intraday basis. For me the bigger picture is about what the UK economy looks like in 3-6 months time in that by then we would have had the formal triggering of Article 50 and would have more clarity over the pace in which inflation is feeding through from the depreciation of the Pound. Therefore although the press are likely to comment on the data and no doubt the Brexiteers will use it as a chance to rejoice following the slight upward revision, I remain steadfast in the belief that the greater pain is yet to come.

The EUR has remained under pressure driven by the same French election jitters that have dominated the week thus far. However, it is the 2yr German yield that has caught the eye this morning having printed at a fresh record low of -0.93%. The Schatz (German 2yr) has seen strong demand of late propped up by its relative safety compared to other European paper (i.e. French, Italian), and with the ECB stepping up its purchases as part of the new parameter change introduced by the Central Bank at the end of last year. With a shrinking universe of bonds to buy it has been the introduction of allowing purchases below the deposit rate of -0.4% that has lead to this sharp rise in interest, this in stark contrast to the US where the market are priced for two rate hikes this year which has consequently led to the 2yr GE/US spread moving to its widest level on record.

 

The Day Ahead

Long equities is here to stay and we look to re-enter the market on any pullback to the S1 and yesterday’s low of 2349. Despite the rise in T-notes we feel this is more in sympathy with the strong move higher in German bonds and fundamentally with US equities remaining firm we look to short T–notes from R1 (125.01). The policy divergence mentioned above means we maintain the short bias in EUR/USD with WTI crude being the only directional change for today. Our strategy for crude is to play the top end of the range with a short from R1 ($54.93) with added protection from the psychological $55 handle.