Greece again at the forefront

At the end of June, Greece missed a EUR 1.6 bn. payment to the IMF. Risk aversion further mounted when a referendum was announced by the Greek PM. With more than 60% voting “No”, the outcome of the referendum was clear enough: the Greeks do not want to support additional austerity measures. Following this event, the ability of the Greek government and its creditors to reach a deal in the coming days/weeks will be an important challenge due to some creditors’ lack of confidence in Greece. From a financial perspective, the banking liquidity stress has made decisions a matter of urgency. Currently, the economy is idling, with the closure of banks and capital controls hampering normal business conditions in the country.

For the time being, the firewalls set by the ECB (OMT, asset purchase programme, bank liquidity) have prevented contagion to other peripheral debt countries: the ECB is committed to doing “whatever it takes” to support the EMU sovereign debt markets. In a low-liquidity environment, the ECB has even decided to expand the list of assets eligible for its asset purchase programme.

Cautious on EMU debt

Fundamentally, macroeconomic EMU figures are trending positively. The PMI Composite increased to 54.2, consistent with 2% growth for the euro zone overall. But most of the market sentiment is driven by the political developments towards the negotiations between Greece and its creditors. We preferred to adopt a cautious stance on EMU debt as the outcome was very uncertain. We have a neutral positioning on Italy, Spain and Portugal but a positive stance on Ireland, whose debt is behaving more and more like an EMU core debt (correlation chart). Relative to the core countries, Ireland is displaying an attractive yield pick-up. Directionally, we have a slightly negative stance on the 10-year German rate on the back of expensive valuation signals. Among the core countries, we have an overweight on France.

Take profit on our EMU linkers

upside potential of EMU linkers is now more limited. We took profit before the recent decrease in oil prices. Besides, the CPI figures are hovering at 0.2% (YoY). Greek funding issues are also a negative driver of the asset class as they could dampen the EMU economic recovery. On a relative basis, we prefer US linkers with better momentum and carry dynamics.

Flattening on the US curve

Despite mixed labour data (NFP slightly below expectations as well as a falling labour participation ratio and flat average hourly earnings), the US business cycle remains robust, with a resilient ISM Manufacturing and increasing home sales. Many investors are now expecting a rate hike for the Fed’s September meeting. In this context, we are keeping our flattening trade on the US Treasuries curve. We are short the 5-year part of the curve and long the 30-year. Historically, the 5/30 segment seems very steep before an upcoming rate hike (Chart 3).