Ecb to extend liquidity support - Estrategia de expertos

UNICREDIT. News and Events:

• ECB: At today’s meeting, the central bank will release updated macroeconomic projections – probably raising the 2010 GDP forecast from 1.0% to 1.6% - and we expect Trichet to announce two/three more 3M liquidity operations with full allotment for the last quarter of this year.
• EMU: The second reading for 2Q GDP (at 1% qoq) will be released today. As regards the expenditure breakdown, we expect that the positive GDP surprise came from both domestic demand and exports.
• SZ: GDP was up 0.9% qoq in 2Q (vs. upwardly revised 1.0% in 1Q).
• US: IJC for the week ending August 28 should probably print at 470K (vs. 473K previously).
• IT: In January-August, the state sector borrowing requirement (SSBR) amounted to EUR 51.7bn, a further improvement (-15%) if compared to the same period of 2009, when the deficit stood at EUR 60.8bn.

FI/FX Strategy:

• Mkt recap/Overnight: Yesterday, yields rose on better-than-expected ISM. Equities benefited from resurfacing risk appetite. The UST 10Y yield reached 2.60% on the news, while the 10Y Bund yield climbed to 2.20%.
• Periphery: As a sell-off hit Bunds, peripheral spreads richened more than 10bp vs. Germany, with the only exception being Portugal. PGB spread vs. Bund fell by only 6bp.
• FR: Today, France will reopen OATs Apr16, Apr20, Apr26 and Apr41, for a total of EUR 7.5-9bn. As France cheapened vs. Austria particularly at the long and extra-long end, we suggest switching from RAGBs into OATs at the 10Y, 15Y and 30Y maturities.
• SP: Spain will re-open Bono Apr15 by EUR 3/4bn. The 5Y area looks interesting vs. the 2Y on the Spanish curve: the spread between SPGB Apr12 and Apr15 trades at ca. 115bp, 11bp higher than its recent four-month average. Healthy demand at the auction should lead to a further tightening of periphery spreads after the recent massive widening.
• FI view: FI markets will focus on the ECB meeting; an extension of liquidity measures is the most likely outcome. The news, although expected, should be bond-friendly, given it will contribute to the persistence of liquidity abundance until early next year.
• FX View: Market euphoria led by strong confidence indicators, soaring stocks and rising bond yields looks a bit excessive, exposing major FX rates to a setback, if this positive sentiment is not confirmed by real data. On balance, we would be prudent about riding this FX rally much further.
• EUR: The EUR-USD picture has improved, but bearish sentiment may resume, if the key 1.2920 level is not regained fast. Caution should then prevail ahead of the ECB meeting today and the US labor data tomorrow.