Fasanara Capital Chartbook – Things To Watch

Things To Watch:

  • Yields are reaching new lows: the average German government bond yield is now below zero for the first time in history. 10yr Bunds are testing April ’15 lows (at +7bps). Curve may flatten from here.
  • Negative yields putting pressure on the banking sector: historically, the European banking index tends to underperform when interest rates drop and the curve flattens. So far in the last month, banks are over-performing yields. Over-performance may fade from here.
  • Within Europe, Italian banks are getting particularly hit: they started to underperform at the beginning of May and the Italian Banks index has now hit new YTD lows.
  • We keep a close eye on the other risk factors:
    • USD/CNH is surprisingly grinding higher, despite weak NFP, dovish Yellen, weak broad US Dollar, EUR & JPY strengthening.
    • Oil and Base Metals decoupled in May: this relation is to be closely monitored, we look at Oil gyrations as short-term heavy volatility, within a long-term downward trend.

Fasanara Capital Chartbook:

The GERMAN AVERAGE GOVERNMENT BOND YIELD now below zero for the first time in history

‘Umlaufrendite’ dived below zero for the first time last Friday after weak US NFP numbers

Now 10trn$ worth of govies globally trade negatively

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GERMAN 10yr and 30yr YIELDS keep falling, curve may flatten further from here

10yr BUND yield already at all-time lows, 30yr BUXL is still ~30bps above historical lows

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Banks over-performed yields recently, gap may narrow from here

RATIO of EU BANKS / EUROSTOXX vs. 10yr BUND YIELD. Historically, the relative performance of European banks over the Eurostoxx correlates well with European yield curves. Banks have over-performed recently. The gap is likely to narrow from here: relatively, yields may rise more than bank equities or fall less than bank equities.

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Italian banks underperformed the EU banking sector in May by most in 2016

Italian Banks hit new YTD lows this week. Their underperformance vs the EU banking sector is now evident, whereas they had moved broadly in tandem during January/February sell-off. Negative news flows (Veneto Banca, recent local elections) might be the driver of the move. Trend to monitor.

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BTP vs. BUND & FTSEMIB vs. EUROSTOXX: Italian underperformance is visible also in the fixed income and broader equity market

The yield spread between 10yr BTPs and 10yr Bunds kept widening since mid-March, while the FTSEMIB underperformed the Eurostoxx even more visibly (10% since January)

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USD/CNH grinding higher, despite broad US Dollar weakness

CNH is nearing the psychological level of 6.60, and fixed at its weakest since2011, despite post-NFP broad US Dollar weakness and good China FX reserve depletion numbers just released.

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OIL and BASE METALS decoupled in May

While the Oil price kept rising and moved to 50$, base metals fell off a cliff and descended below March lows. A trend to monitor closely for clues on who is right of the two.

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Francesco Filia

CEO & CIO of Fasanara Capital ltd