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Enron Mail |
COMMENTS
EUR SWAPS Flows generally light, with a continuation of the front end receiving action from Tues pm, in both 1y1y and 2yr, albeit in smaller size into the dramatic sell off. Swap spreads broadly tighter led by the front end, with 5yr 1bps & 2yr 1.5bps tighter. Curve flattening on the sell off, 2-10's 2.5bps flatter in swaps, & heading for 5bps flatter in cash, the slack taken up by the extra narrowing in s'end swap spreads. 10-30's 2bps flatter in line with cash curve flattening to leave 30yr spreads broadly unch. 5yr underperforming curve badly, with 2-5-10's fly around 13bps here, there are a few offside posns at these lvls who could well get blown out if we push much further. The market appears to have little appettite for risk at the moment as dealers appear to have been burnt over the larger more prolonged sell-off than expected. Price action and liquidity is very poor so far today. No sign of Tresor in the last day or so, despite higher yields. EUR BONDS Same situation in Eur cash with the 5yr sector destroyed in the downmove with s'end somewhat anchored. Today we have new Eur3.4-3.8bn 5yr btan auction, 3.75% Jan 2007, trading around 5.5bp over the BTAN of July 2006, in the grey market. This is expensive on terms of historical benchmark premium & equates to around even to 138's in swap spread terms & around 4bps rich to July 06 btan in swap psrrad terms. We are pretty indifferent at these lvls & are seeing limited domestic interest, but can see it continuing to trade quite expensive, at least in the short term, due to the equivilent richness in the 5yr deliverable german sector and the scarcity of alternative bonds in the 07 area. We also have the OAT reverse auction today, with OAT 4% Apr 2009, 4% Oct 2009 and 5.5% Apr 2010 will be bought back for a maximum of Eur2bn, with the 7yr sector trashed even more than the 5yr, it makes sense for the tresor to be prepared to pay up a little to buy back still comparatively cheap bonds, but little sense for end clients to tender, altho maybe worth waiting in the tail you might just get filled. EUR VIEWS Financial markets have been keen to anticipate a recovery in global economic activity. But in Europe, things still look bleak. 1.Euroland Q3 is coming in weaker than expected. German GDP was -0.1% in Q3 compared with our forecast of +0.1%. With Italy at +0.1% and the Netherlands at -0.4%, Euroland GDP is unlikely to be better than +0.1%. We will have a more complete picture tomorrow with France (our forecast is +0.25%) 2.The October German Ifo survey was very disappointing, particularly the further marked decline in business expectations from 95.9 in August to 90.5 in September to 89.6 in October. This is one of the best leading indicators of Euroland industrial activity and is one of the three components of the GS leading indicator. Another component - the Belgian manufacturing confidence index is out at 3pm today. 3.Perhaps most worrying of all, our European equity analysts report another deterioration in economic activity in both Euroland and the UK in November (see today's European Daily Comment for details). With few exceptions, our analysts report that economic conditions are still deteriorating or are stabilising at very low levels. We are happy with our below consensus forecasts for GDP growth in 2002 of +0.6% in Euroland (consensus +1.5%) and 1.4% in the UK (consensus 2.0%).We also continue to believe that interest rates will fall by 50bp in both Euroland and the UK over the next 3-6 months. There is value in the front end of Europe. LEVELS (close to close, ex basis) SWAP CURVE GBP/EUR(EUR convention) today t-1 5y5y -23 -22 15y15y -137 -140 10/30? -35.0 -35.5 10/30E +43.8 +45.7 EUR SWAP SPREADS 5y: Bobl 138 24.4 1.2 narrower 10y: Jan 11 bund 32.9 1.6 narrower 30y: Jan 31 bund 21.9 0.4 narrower EUR SWAP VOLATILITY 3m into 10yr 14.6 0.1 higher 1y into 10yr 13.1 unch 2y into 10y 12.6 unch 5y into 5y 12.5 unch 5y into 25y 10.6 0.1 higher 10y into 20y 10.0 0.1 higher 5y5y swaption/5x10 cap spread 2.3 This material is for your private information, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Certain transactions, including those involving futures, options, and high yield securities, give rise to substantial risk and are not suitable for all investors. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. 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