Let’s take a look at the UK once again with the aim of setting or renewing FI strategy. A brief commentary will suffice and the term structure will suit the purpose of demonstration. This is the single key dynamic to any desk, no matter how sophisticated the operation.
Readers may recall that in early June we identified 270 as the preferred entry point to own the curve, 2-30, and noted that this strategy, even for 2-30 was not simply directional. Key, our view, was that the course-of-least resistance for this spread was to be wider over the intermediate term. The E-Z panic of 6/27 afforded the 270 print and clients were to be long (L–S) this spread, or something similar from that juncture. The spread then expanded satisfactorily to 285 +/-, July/5 with both ends cooperating.
We did not recommend profits be taken; the spread came back in to 270, mid July. We continued to recommend entry at this point; see our post of 7/17. Again the spread expanded nicely to something on the order of 286, 8/7, and this despite weak Manuf PMI, Retails Sales prints, etc., for the very reason that this weakness was priced in at 270.
Then of course there was yesterday! Yesterday King’s less-than-buoyant economic outlook and hesitancy to provide additional firing brought the spread in quickly, last 281. The less-than-buoyant outlook was something we predicted to clients; the hesitancy to print more money we did not.
Now what?
The UK real sector will not cooperate with King’s view. It will remain weak naturally, just not that weak. But as a central bank chief and thus god to the market crowd, his prognosis is taken as gospel, for now.
It is true that the UK will get no help from the E-Z; simply witness today’s trade figures. But there will be more appetite from the US and Canada than is now priced in.
Avoid outrights like the plague naturally but expect the course-of-least resistance to remain wider for the UK term structure. Readers do not want to look for the chance to sell (S-L) this spread. Sure there are unknowns – after all, the business of the future is to be dangerous but the odds favor our approach over the intermediate term.
Robert Craven
Readers may recall that in early June we identified 270 as the preferred entry point to own the curve, 2-30, and noted that this strategy, even for 2-30 was not simply directional. Key, our view, was that the course-of-least resistance for this spread was to be wider over the intermediate term. The E-Z panic of 6/27 afforded the 270 print and clients were to be long (L–S) this spread, or something similar from that juncture. The spread then expanded satisfactorily to 285 +/-, July/5 with both ends cooperating.
We did not recommend profits be taken; the spread came back in to 270, mid July. We continued to recommend entry at this point; see our post of 7/17. Again the spread expanded nicely to something on the order of 286, 8/7, and this despite weak Manuf PMI, Retails Sales prints, etc., for the very reason that this weakness was priced in at 270.
Then of course there was yesterday! Yesterday King’s less-than-buoyant economic outlook and hesitancy to provide additional firing brought the spread in quickly, last 281. The less-than-buoyant outlook was something we predicted to clients; the hesitancy to print more money we did not.
Now what?
The UK real sector will not cooperate with King’s view. It will remain weak naturally, just not that weak. But as a central bank chief and thus god to the market crowd, his prognosis is taken as gospel, for now.
It is true that the UK will get no help from the E-Z; simply witness today’s trade figures. But there will be more appetite from the US and Canada than is now priced in.
Avoid outrights like the plague naturally but expect the course-of-least resistance to remain wider for the UK term structure. Readers do not want to look for the chance to sell (S-L) this spread. Sure there are unknowns – after all, the business of the future is to be dangerous but the odds favor our approach over the intermediate term.
Robert Craven
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