T-bills outlook "bleak" even if debt ceiling extended - SaxoBank

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A deal seems just on the horizon for an extension to the U.S. debt ceiling, but for Althea Spinozzi, senior fixed income strategist at Saxo Bank, volatility in U.S. rates is far from over.

Writing in a note, Spinozzi points out that once Congress passes the deal, the Treasury must issue large amounts of bonds, particularly by the end of June.

"That, together with quantitative tightening (QT) and an RRP rate of 5.05%, translates to high T-bills yields for longer and a further bear flattening of the yield curve," she writes.

So even though the risk of a default will have been removed, the outlook for short-term U.S. Treasuries remains "bleak", she says.

Spinozzi foresees a sudden liquidity drainage, given around $1 trillion in bills need to be issued before the end of the year, with about half to be issued by the end of June, adding further pressure from ongoing QT.

The question, she says, is whether the market will be able to absorb all that new supply.

Banks' reserves may provide a little buffer, but it will not be enough to take it all. So money market funds will have to absorb the new bills.

The caveat is that T-Bills must cheapen enough to offer a pickup over the RRP (reverse repurchase agreement), says Spinozzi, adding that yields will continue to soar in the near term and remain elevated.

"Yet, a liquidity squeeze will be a massive drag to the economy and will likely limit the selloff in long-term rates unless the Treasury decides to increase the new long-term notes issuance."

(Lucy Raitano)



On Monday, Spanish Prime Minister Pedro Sanchez called a snap election, moving the expected vote forward to July from late 2023.

Since Monday's announcement, Spain's IBEX 35 .IBEX index has lost only 0.3%, outperforming the pan-European STOXX 600 .STOXX which has lost 1.4% in that time. For contrast, Italy's FTSE MIB .FTMIB is down 1% since Monday.

Sanchez's snap election came as a surprise, and follows heavy losses for his party in recent local elections.

But what might the economic implications be, ING analysts ask in a recent note.

First and foremost, rising political uncertainty might impact Spain's economic momentum, which is already looking murky in the face of more ECB interest rate hikes, despite a bit of growth at the start of the year on thriving tourism.

As the energy crisis subsides - which Sanchez faced head on with a series of support packages - Spain's public finances will also come back into focus, and they are "far from rosy" according to ING analysts.

Public debt is at 113.2% of GDP in 2022 and the country has a deficit of 4.8% of GDP.

"Although the European Commission forecasts a gradual reduction of the deficit in 2023, it will still amount to 4.1% of GDP," ING say.

"This puts Spain well above the 3% limit, which the European Commission considers an excessive deficit. So, European pressure for fiscal consolidation measures will increase."

Relatively better growth compared to the rest of the eurozone is supportive of Spain's bond market, ING say, but prevailing political uncertainty may increase the risk perception of Spanish government bonds, leading investors to demand higher yields.

Lagging productivity growth will also pose a challenge to the new government, as well as calls for labour market reforms in light of the incoming energy transition, and the fight to bring down Spain's sky-high unemployment rate.

(Lucy Raitano)



Markets have been set alight as an AI rally ripples through the global stock market and Europe is no exception. But for Barclays' equity strategy team, some investor wariness is lurking just beneath this "AI buzz".

Key investors are neutral on equities, they found, and are hedged for the downside, while being long on cash and underweight cyclicals.

"So positioning alone not such a threat to stocks."

Systemic and macro hedge funds are the main buyers of stocks, with exposure close to neutral levels, Barclays said. Mutual funds and retail investors' equity allocations are also close to long-term averages.

"Overall, despite a resilient equity market and the frenzy in the tech space, broad equity exposure is neutral at best. So fairly symmetric from a risk-reward standpoint, rather than a particular threat to the equity market, in our view," write the strategists.

A significant amount of dry powder also means investors might continue buying dips, as they have done so far this year, Barclays said.

Mutual funds still prefer cash and bonds over equities, though, and an inverted yield curve is still signalling recession fears in the bond market.

"Down the road, rotation from MM funds to equities may be constrained further if cash goes further towards new bill issuance post debt ceiling resolution," the Barclays strategists warn.

Weak European data and the AI gold rush may be favouring the U.S. over Europe for now, as outflows from the latter resume and U.S. investors stall on buying.

Barclays says investors should stay overweight tech, which they say is not overcrowded despite the AI influx.

(Lucy Raitano)



European shares slipped to a two-month low as weak PMI data from China fuelled concerns about a global slowdown and countered optimism from signs of easing inflation in Germany and France.

The pan-European STOXX 600 index .STOXX was last down 0.3%, after hitting its lowest level since March 30 as data showed factory activity in China shrank faster than expected in May on weakening demand. China is Germany's main trading partner.

Capping declines, numbers showed French inflation cooled more than expected in May, while German state North Rhine-Westphalia also saw easing price pressures this month.

On the corporate front, shares in SBB SBBb.ST fell around 9% to the bottom of the STOXX 600 after the Swedish real estate group's biggest owner postponed interest payments on loans.

(Joice Alves)



With the U.S. debt ceiling bill clearing an important procedural hurdle en route to a vote in the House of Representatives on Wednesday, markets are back in data-watching mode for now.

Unfortunately, there's little respite on that front given disappointing economic activity and persistently elevated inflation data out of Asia.

China's official PMIs indicated a faster-than-expected contraction in manufacturing activity and slower growth in services in May. That followed consistently weak economic releases for April, suggesting the post-COVID reopening bounce has run out of steam.

Forecast-beating Australian consumer prices, released at exactly the same time, appeared to back up Reserve Bank of Australia Governor Philip Lowe's earlier warningthat risks to inflation are on the upside, keeping rate hike bets alive.

The Aussie dollar's volatile reaction sums up the mood - the risk-sensitive currency bounced initially on the CPI release before more than reversing its gains due to the bleak Chinese data.

Asian stock markets fell and even U.S. equity futures turned negative despite the debt ceiling reprieve, while China's yuan promptly skidded to fresh six-month lows, giving the U.S. dollar a broad boost.

News of a North Korean satellite launch and intensifying fighting in Ukraine only added to the grim backdrop.

Europe's calendar is likely to be dominated by national CPI releases from France, Germany and Italy for May ahead of Thursday's flash euro zone inflation number. Italy's first-quarter GDP and the European Central Bank's biannual Financial Stability Review are also due.

In the U.S., the Federal Reserve's Beige Book will be of interest and a number of Fed officials are also scheduled to speak. But much of the focus will, of course, be on the House debate over the debt ceiling bill.

Key developments that could influence markets on Wednesday:

German, French, Italian May CPI; Italy's Q1 GDP

ECB's Financial Stability Review, Bank of Italy Governor Ignazio Visco's speech, Bank of England MPC member Catherine Mann participates in a panel

U.S. JOLTs data, Fed Beige Book, House vote on debt ceiling

Earnings: Salesforce, Nordstrom

(Sonali Desai)



European futures are in negative territory as China's weak factory activity figures offered the latest evidence that recovery in the world's second-biggest economy is faltering.

Data showed China's manufacturing activity PMI fell to 48.2 for May, contracting even faster than expected.

On a brighter note, there are signs inflation is easing in Germany. Data from the country's most populous state, North Rhine-Westphalia, showed inflation cooled in May. Nationwide inflation data is due at 1200 GMT.

Also on focus today, legislation brokered by President Joe Biden and House Speaker Kevin McCarthy to lift the $31.4 trillion U.S. debt ceiling and achieve new federal spending cuts passed an important hurdle late on Tuesday, advancing to the full House of Representatives for debate and an expected vote on passage on Wednesday. The House Rules Committee voted 7-6 to approve the rules allowing debate by the full chamber.

(Joice Alves)


Weak China domestic demand https://tmsnrt.rs/3WGxOnI

spain stocks https://tmsnrt.rs/3OJEmzZ


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