Fra BNP Paribas:
The Fed to set the tone and direction
In the US, the rates market is now pricing a 100% probability of a Federal Reserve hike today and a 50% probability of another 25bp hike in June.
The nonfarm payroll and unemployment numbers confirmed the momentum of the economy, and the Fed should recognise this in their policy adjustment today.
As the rate move is widely expected, the message and any revision of the ‘dots’ will be more important for the market.
This leaves several markets exposed to negative shocks if the Fed looks likely to hike at a faster pace than currently expected, causing volatility to pick up.
Some markets that have done extremely well, such as commodities and US HY, may be more at risk of a further correction as financing costs rise.
The European Central Bank acknowledged the improvement in data and has shifted its language to a more neutral stance. If the data continue to improve and political risk abates after Q2, we could well see the first rate hike in Europe during the third quarter of this year.
Our political risk indicator is showing that political risk has fallen in Europe, but it has not disappeared. We look to today’s Dutch elections (15 March) for the direction of risk.
Overall position: We see pressure on global rates markets: US, Europe and Japan. With rates rising, we see upside for the SX7E and SX5E versus the S&P.
We see continued short-term downside for US HY bonds on the back of rising rates and commodity prices weakness (is this the ‘canary in the coal mine’ for US equities and EM?).
We expect commodities (hard and energy-related) to correct further (downwards).
Real yields are moving higher – further rises will likely trigger a risk-off correction (a lot depends on the Fed’s signalling today).
