United Kingdom: Real consumption, GDP and investment (YoY in %) Housing investment (L) Productive investment (L) Household consumption (R) Real GDP (R) 40 8 30 6 20 4 10 2 0 0 -10 -2 -20 -4 -30 -6 -40 -8 96 98 00 02 04 06 08 10 12 14 16 18 Source : ONS 32 C 1 - P u b l i c N a t
Growth: the potential costs of Brexit Cumulated impact on UK GDP (in %), in 2023 in case of: • Economic Partnership: -1.25 to -3.75% • No transition period ans no deal: -7.75 to -10.5% Cumulated impact on EZ GDP (in pp), in case of no deal and interruption in trade: • Quarter +4: - 2.1% • Quarter +12: - 1.7% Sources: BoE, EU withdrawal scenarios and monetary and financial stability 33 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
The European calendar Brexit Roadmap March : start of € campaign April-May : Lead candidates debates 18 April : last € parliament session • Each decision has to be backed by UK MPs, which are trying 23-26 May : European elections to take other the whole negocation process 20-21 June : € council summit • EU wants a plan before agreeing to a potential extension. July 2 nd : Inaugural plenary session of End February : time limit set by the the newly-elected € Parliament House -> not binding for the govt Try to High Plan B renegociate with EU Try to 27% New Exit renegociate referendum with EU Where to ? 27% Try to New Probability elections renegociate with EU need 2/3 MPS March 29 : current • Extension is needed given the pretty deadline to get an tight calendar 23% No-deal agreement • Need EU Council approval to get an extension Low Revoke Remain 7% Article 50 Sources : Smarkets, Natixis 34 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Current account balance (as % GDP) United States 6 6 Japan United Kingdom 4 4 Euro zone 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 96 98 00 02 04 06 08 10 12 14 16 18 Sources : Datastream, BEA, ECB, ONS, IMF, NATIXIS 35 C 1 - P u b l i c N a t
Industrial production index (100 in 1996:M1) United States Euro zone 150 150 United Kingdom Japan 140 140 130 130 120 120 110 110 100 100 90 90 80 80 70 70 96 98 00 02 04 06 08 10 12 14 16 18 Source : Datastream 36 C 1 - P u b l i c N a t
ITALY 37 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Spread vs Bund 600 600 OAT - BUND BONO - BUND BTP - BUND 500 500 400 400 300 300 200 200 100 100 0 0 07 09 11 13 15 17 19 Sources : Datastream, NATIXIS 38 CONTAGION TO STRIKE BACK IN 2019 ? DECEMBER 2018 C 1 - P u b l i c N a t
Per capita productivity (100 in 1996:1) Germany Spain Italy Portugal Greece Austria 140 140 United Kingdom France 135 135 130 130 125 125 120 120 115 115 110 110 105 105 100 100 95 95 90 90 96 98 00 02 04 06 08 10 12 14 16 18 Sources : Statistisches Bundesamt, INSEE, BDE, ISTAT 39 C 1 - P u b l i c N a t
2019 will be challenging despite the new deficit target The Italian government revised its deficit target for this year, from 2.4% to around 2%. Italy is now likely to avoid an EDP, a lesser evil if we consider the upcoming economic slowdown … Risks of having some rating downgrade are still high, notably during the second half of 2019. March 15 April 26 January 31 May 24-26 Moody’s Review S&P review Q4 2018 GDP European Baa3 / STA BBB / NEG first estimate elections February 15 April May 1 Fitch review Stability & Q1 2019 GDP Growth Pacts first estimate BBB / NEG presented Sources: Natixis Economic research (Camille Neuvile), EC, Istat Source : Natixis 40 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Guess who will be buying some BTPs in 2019 ? Residents vs Non-residents holdings of marketable debt (% of total) EZ banks - Cumulated flows on sovereign 100% since Jan. 2015 (Bn) Other residents : 90% 40 46,8% 80% 20 70% 0 60% -20 50% -40 Banca d’ Italia : 19,5% 40% -60 30% Italy Portugal Non-residents : -80 20% Ireland Spain 33,8% -100 10% Source : Banca d’ Italia France Germany -120 0% Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 0 1 / 0 7 0 1 / 0 9 0 1 / 1 1 0 1 / 1 3 0 1 / 1 5 0 1 / 1 7 Purchases of BTPs by the Eurosystem and adjusted net supply (Bn) Net Gross Net supply - net purchases Reinvest? purchases Supply* Net supply PSPP 112 2017 112 1 263 50 -62 2018 38 21 59 240 59 21 36 2019 0 36 260 65 65 Source : Natixis *56Bn net supply in 2019 Source : Natixis 41 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
What the end of the APP means for sovereign issuers ? Share of issuance program completed • Towards more balanced & less supportive offer / as of Fed. 2019 demand ratios in Europe with the end of net assets GRE purchases. SK NL The Eurosystem will buy 19% of all sovereign bonds • GER issues vs 35% in 2018. BEL FRA ITA • Italy’ supply will increase towards 250Bn in 2019 SPA while Spain will cut its program by 7Bn. Germany & IRL POR France up as well. EFSF/ESM FIN YTD : Belgium nearly completed 40% of its issuance • AUT program 0% 10% 20% 30% 40% 50% 60% 2018 2019 2018 & 2019 sovereign issuance program vs PSPP purchases (Bn) Gross PSPP / Gross Gross supply PSPP reinvestments Gross purchases Net APP supply 2018 2019 2018 2018 2019 2018 2019 delta 2018 2019 Germany 145 156 55 27 40 82 40 -51% 56% 26% France 225 230 44 19 35 63 35 -44% 28% 15% Italy 238 250 38 21 38 59 38 -36% 25% 15% Spain 132 125 30 9 29 39 29 -26% 29% 23% Portugal 16 13 5 2 3 7 3 -52% 46% 27% Ireland 17 16 5 2 3 7 3 -59% 39% 18% Belgium 34 28 8 4 4 12 4 -65% 34% 14% Austria 18 19 6 2 5 8 5 -36% 46% 28% Netherlands 22,4 21 12 7 6 19 6 -66% 84% 30% Finland 11 9 4 1 1 5 1 -76% 48% 14% Slovakia 3 4,3 2 1 1 2 1 -79% 83% 12% Total 861 871 209 95 166 303 166 -45% 35% 19% Source : Natixis 42 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Italian Banks liquidity on a daily basis. • Deleveraging and issuing more bonds are the sole • solutions if TLTRO II are not rolled over by the ECB. TLTRO II 1 TLTRO II 2 TLTRO II 3 TLTRO II 4 Launching date Jun-16 Sep-16 Dec-16 Mar-17 Maturity Jun-20 Sep-20 Dec-20 Mar-21 First repay. date Jun-18 Sep-18 Dec-18 Mar-19 Initial demand 399,0 45,3 62,2 233,5 Cumul. Stock (Bn) 399 444 506 740 Nb banks 514 249 200 474 participating Amount repaid so far 16,2 / 4% 1 / 2% 0,7 / 1% 0,0 Current 385,3 44,4 62,2 233,5 outstanding Italy Spain France Germany LTRO + TLTRO in 247 170 114 93 May 2018 (Bn) Oct. 2018 (Bn) 239 168 114 93 Repaid so far : 17,7 -8 -2 0 0 Source : Natixis C 1 - P u b l i c N a t
The design of the new VLTRO / TLTRO III The ECB will announce a new VLTRO (TLTRO III) between June • and December 2019. Later than expected ! The new operation should be more restrictive with a shorter • duration and positive cost for banks. • Incentive for banks to keep their TLTRO II will be high (notably for the ones grabbing a 40bp bonus). + - VLTRO / TLTRO III: Willingness to transform your TLTRO II into the new VLTRO What design? TLTRO II 1 TLTRO II 2 TLTRO II 3 TLTRO II 4 Announced btw June-Dec. 2019 with • June 2020 Sept. 2020 Dec. 2020 March 2021 first discussions in March 399Bn 45Bn 62Bn 233Bn • A roll, not a new operation • Only 1 operation, launched 1 quarter after the formal announcement Maturity 2Y • VLTRO / TLTRO III • Linked to the MRO. Launch : Sept. or Dec. 2019 • Max outstanding = current TLTRO II Maturity : Sept. or Dec. 2021 outstanding Source : Natixis 44 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Italian risk in credit markets The most exposed: More than 40% of peripheral risks in the iBoxx AT1 index… followed by €HY and Hybrids. The least exposed: Bk Senior, Non- Financial Senior The most sensitive: AT1, Bank Sub, Insurance Sub, iTraxx X- Over & €HY Share of peripheral credits in iBoxx indices Sensitivity to iBoxx spreads to Peripheral sovereigns spreads 45% 1.4 ES IT 40% 1.2 35% 11.1% 1.0 30% 0.8 25% 0.6 20% 2.6% 0.4 15% 29.5% 11.4% 0.0% 10% 0.2 11.5% 5.4% 9.5% 14.8% 4.2% 5% 9.7% 8.9% 0.0 5.1% 5.5% 3.2% 1.8% 0% Sources: Markit, Bloomberg, Natixis Sources: Markit, Bloomberg, Natixis C 1 - P u b l i c N a t
FRANCE 46 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Monthly barometer of President Macron compared to other recent French presidents Source : Natixis 47 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Cost of the measures granted by the government to the yellow vests in late 2018 48 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Flow-wise, the crisis had a clear impact on financial mkts Assets bought/sold by non-residents - Cumulated flows ($Bn) France Germany Italy Spain US Japan major EM* Equities H1-2018 -0,8 -2,8 -1,8 1,1 -1,2 47,6 25,9 H2-2018 -10,6 -7,9 -2,4 -2,8 -24,8 26,7 10,3 out of which Q4-2018 -7,9 -5,6 -1,7 -1,7 -63,0 23,2 11,9 Bonds H1-2018 -1,1 0,3 -1,0 -2,8 49,6 -1,0 -0,5 H2-2018 -8,4 -5,0 -6,8 -6,1 -8,0 -3,1 -2,5 out of which Q4-2018 -6,5 -3,6 -5,1 -4,5 -36,3 -2,4 -2,4 EQ+Bonds H1-2018 -1,9 -2,5 -2,8 -1,6 48,3 46,7 25,4 H2-2018 -19,1 -12,9 -9,2 -8,9 -32,8 23,6 7,8 -14,4 -9,3 -6,8 -6,2 -99,3 20,7 9,4 out of which Q4-2018 mid-Nov.-> end Dec. -9,6 -5,7 -4,2 -3,8 -70,8 4,2 2,0 Source : EPFR *Brazil, India, Russia, China, Turkey Non-residents cumulated flows on Non-residents cumulated flows on 10 2 bonds (Bn) stocks (Bn) 0 5 -2 0 -4 -6 -5 -8 -10 -10 -15 -12 France Germany Italy Spain France Germany Italy Spain Source : EPFR 49 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
EUROPEAN ELECTIONS : REAL THREAT OR NOT ? 50 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
European elections New Parliament’s composition 23 – 26 May • • Proportional vote 751 MEPs -> 705 (conditional on UK exit) • Electoral Electoral Election Multiple Election Multiple 2014 2019 Change treshold 2014 2019 Change treshold day* constituencies day* constituencies (%) (%) Belgium Lithuania 11 21 21 = 26 5 oui 11 = 26 5 - Bulgaria 17 17 = 26 - - Luxembourg 6 6 = 26 - - Czechia 21 Hungary 21 21 = 26 5 - 21 = TBD 5 - Denmark 13 Malta 6 14 +1 TBD - - 6 = 25 - - Germany 96 Netherlands 26 96 = 26 - - 29 +3 23 - - Estonia 6 7 +1 26 - - Austria 18 19 +1 26 4 - Ireland 11 Poland 51 13 +2 24 - oui 52 +1 TBD 5 oui Greece 21 Portugal 21 21 = 26 3 - 21 = TBD - - Spain 54 Romania 32 59 +5 26 - - 33 +1 26 5 - France 74 79 +5 26 5 - Slovenia 8 8 = TBD - - Croatia 11 Slovakia 13 12 +1 TBD 5 - 14 +1 25 5 - Italy 73 Finland 13 76 +3 26 4 oui 14 +1 26 - - Cyprus 6 Sweden 20 6 = 26 1,8 - 21 +1 TBD 4 - Latvia 8 8 = 25 5 - United Kingdom 73 0 -73 - - - Total 751 705 -46 - - - Source: Natixis, European Parliament * Note: election days are subject to change 51 C 1 - P u b l i c N a t
The European parliament role • The Parliament and the Council of the European Union (national governments) approve the proposals for laws and budgets that the European Commission initiates. The Parliament’s approval is required for the adoption of most European laws (under the ordinary legislative procedure) and for the vote on the EU’s annual budget. • Moreover, it controls other European institutions by taking part in the appointment of their members (consultation or direct election of candidates), including the President of the ECB and the European Commissioners. • The Parliament also supervises their decisions . Lastly, it is to the Parliament that citizens can bring petitions to directly address the European institutions. Source : https://www.touteleurope.eu/actualite/les-institutions-europeennes.html 52 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
European elections The populism in Germany Germany: Polls* for the next election (%) 2014 European - The Alternative for Germany (AfD), located 2017 Federal Parliament election 45 45 election on the extreme right, is the main populist 40 40 party in Germany. 35 35 30 30 - It reached 12.6 at the 2017 federal election 25 25 and currently polling around 13%. 20 20 15 15 - The main focus of the AfD is immigration 10 10 but the party remains also very critical on 5 5 0 0 any further integrational steps at the j-14 a-14 j-14 o-14 j-15 a-15 j-15 o-15 j-16 a-16 j-16 o-16 j-17 a-17 j-17 o-17 j-18 a-18 j-18 o-18 j-19 European level. Bündnis 90/Die Grünen Christlich Demokratische Union Deutschlands Note: *moving average of Alternative für Deutschland the last five polls available Freie Demokraten Die Linke Others Sources : Poll of polls, Natixis Sozialdemokratische Partei Deutschlands 53 C 1 - P u b l i c N a t
European elections The populism in France France : voting intentions in the European elections IFOP poll of the 31 of January 2019 - Between 2014 and 2019, the French Rassemblement national political landscape has been marked by the La République en Marche et… weakening and fragmentation of the Les Républicains traditional parties, as well as the emergence La France insoumise of new parties. Europe Ecologie Les Verts Debout la France - Risk of an over-representation of the parties Parti socialiste Autres* exceeding the 5% threshold. Several parties Génération.s should fail to exceed 5% (Génération.s, UDI UDI, Parti Communiste, Les Patriotes). Parti Communiste Lutte Ouvrière Les Patriotes Source : Opinionway, Natixis Union Populaire Républicaine -5 5 15 25 54 C 1 - P u b l i c N a t
European elections The populism in Italy Italy: Polls* for the next election (%) - The government has been governed by and 2014 European 2018 General Parliament election 45 45 election unprecedented coalition of two populist 40 40 parties since 2018. 35 35 30 30 - Since the M5S-Lega coalition took power, 25 25 the Lega has been surging in the opinion 20 20 polls: 33% vs 17.4% in March 2018. 15 15 10 10 - The two parties will not run together in 5 5 European elections. 0 0 j-14 a-14 j-14 o-14 j-15 a-15 j-15 o-15 j-16 a-16 j-16 o-16 j-17 a-17 j-17 o-17 j-18 a-18 j-18 o-18 j-19 Partito Democratico Liberi e Uguali (LeU) + Europa M5S Forza Italia Lega Fratelli d'Italia (FdI) Note: *moving average of the last Sources : Poll of polls, Natixis five polls available 55 C 1 - P u b l i c N a t
European elections The populism in Spain Spain: Polls* for the next election (%) 2014 European - The populist nature of Spanish parties parliament election 2016 General 45 45 election seems to be limited to Podemos at the left 40 40 (14% current polls) and Vox at the far right 35 35 (10%). 30 30 25 25 20 20 - We note a virtual absence of europhobic 15 15 parties in Spain. While Podemos is a 10 10 Europhile party, Vox seeks to regain some 5 5 sovereignty lost but does not make 0 0 j-14 a-14 j-14 o-14 j-15 a-15 j-15 o-15 j-16 a-16 j-16 o-16 j-17 a-17 j-17 o-17 j-18 a-18 j-18 o-18 j-19 eurosceptic statements. Partido popular Note: *moving average Vox of the last five polls Podemos available Partido Socialista Obrero Espanol Esquerra republicana Sources : Poll of polls, Natixis Ciudadanos 56 C 1 - P u b l i c N a t
European elections No real threat of a populist Parliament For the first time, the EPP and S&D are likely to fail to secure a majority (308 seats against 353). However, adding up the seats of the ENF, ECR, EFDD, GUE/NGL and the new parties that are not affiliated yet does not lead to a majority either (249). Above all, populist parties are very unlikely to join forces and create a combined front (limited common ground between the different parties) European elections: Projection in terms of seats as of 2014 European election results March 4th 2019 Greens/EFA Greens/EFA 50 ENF 41 62 ALDE EPP ECR ALDE EPP 99 176 70 67 221 ECR 62 EFD S&D S&D EFDD 39 191 132 NI 48 52 New GUE/NGL GUE/NGL 35 705 51 751 52 NI 8 European United Left-Nordic Green Left European United Left-Nordic Green Left Progressive Alliance of Socialists and Democrats Progressive Alliance of Socialists and Democrats Greens-European Free Alliance Greens-European Free Alliance Alliance of Liberals and Democrats for Europe group European People's Party group Alliance of Liberals and Democrats for Europe group Europe of Nations and Freedom European People's Party group European Conservatives and Reformists European Conservatives and Reformists Europe of Freedom and Direct Democracy Europe of Freedom and Direct Democracy New unaffiliated parties Source: Natixis, Poll of polls Source: Natixis, Poll of polls Non-Inscrits Non-Inscrits 57 C 1 - P u b l i c N a t
CENTRAL BANKS & RATES 58 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Expansions don’t die of old age, Central bankers kill it 59 C 1 - P u b l i c N a t
World money base (in $ and national currencies) Billions of $ (LHS) YoY as % in $ (RHS) 26000 55 YoY as % in national currencies (RHS) 24000 50 22000 45 (*) US, Canada, EU 15, Japan ; China, Inde, Others 20000 40 emerging countries from Asia, CEEC's ; Latin America include Mexico, Russia, Norway and OPEC 18000 35 16000 30 14000 25 12000 20 10000 15 8000 10 6000 5 4000 0 2000 -5 96 98 00 02 04 06 08 10 12 14 16 18 Sources: Centrals Banks, calculation NATIXIS 60 C 1 - P u b l i c N a t
Intervention rates Fed Funds 8 8 Euro zone UK: base rate 7 7 Japan: overnight interest rate 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 96 98 00 02 04 06 08 10 12 14 16 18 Sources : Datastream, Fed, ECB 61 C 1 - P u b l i c N a t
Germany: Long term interest rate 6,5 6,5 10 years 30 years 5 years 2 years 6,0 6,0 5,5 5,5 5,0 5,0 4,5 4,5 4,0 4,0 3,5 3,5 3,0 3,0 2,5 2,5 2,0 2,0 1,5 1,5 1,0 1,0 0,5 0,5 0,0 0,0 -0,5 -0,5 -1,0 -1,0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Datastream 62 C 1 - P u b l i c N a t
Interest rates on fixed-rate business loans 9 9 France Germany Spain Italy Greece Portugal 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Sources: Eurostat, ECB, Natixis 63 C 1 - P u b l i c N a t
Money bases (in national currency) United States (Billions of $, LHS) 4800 580 4500 540 Euro zone (Billions of €, LHS) 4200 500 3900 United Kingdom (Billions of £, RHS) 460 3600 420 Japan (Trillions of Yen, RHS) 3300 380 3000 340 2700 300 2400 260 2100 220 1800 180 1500 140 1200 100 900 60 600 300 20 96 98 00 02 04 06 08 10 12 14 16 18 Source: Datastream 64 C 1 - P u b l i c N a t
Pro cyclical 65 C 1 - P u b l i c N a t
Central Banks Outlook:Wait and See and Powell Put? The case for raising rates has weakened. We can best support the economy by being patient. Powell Jan,30 Eonia, Euribor & Libors 29/12/2017 31/12/18 30/01/2019 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 FED 1,50 2,50 2,50 2,50 2,50 2,50 2,50 2,50 2,50 3M Libor $ 1,69 2,81 2,74 2,77 2,72 2,70 2,75 2,70 2,65 Forward 2,66 2,68 2,68 2,69 2,61 2,55 BCE 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,25 0,50 3M Euribor -0,33 -0,31 -0,31 -0,32 -0,31 -0,28 -0,11 0,16 0,34 Forward -0,30 -0,29 -0,27 -0,24 -0,21 -0,16 Eonia -0,35 -0,36 -0,37 -0,36 -0,36 -0,36 -0,23 0,04 0,29 BOE 0,50 0,75 0,75 0,75 1,00 1,00 1,00 1,00 1,25 3M Libor £ 0,52 0,91 0,92 0,95 1,10 1,14 1,18 1,22 1,40 Forward 0,92 0,95 0,99 1,05 1,08 1,12 BOJ -0,10 -0,10 -0,10 -0,10 -0,10 -0,10 -0,10 -0,10 -0,10 3M Libor ¥ -0,02 -0,07 -0,10 -0,05 -0,05 -0,05 -0,05 -0,05 -0,05 Forward 0,03 0,04 0,04 0,04 0,05 0,05 SNB -0,75 -0,75 -0,75 -0,75 -0,75 -0,75 -0,50 -0,25 -0,25 3M Libor CHF -0,75 -0,71 -0,71 -0,75 -0,75 -0,75 -0,50 -0,25 -0,25 Forward -0,72 -0,72 -0,72 -0,68 -0,63 -0,58 66 C 1 - P u b l i c N a t
Unit labor costs (YoY as %) United States (incl benefits, non financials) Euro zone 8 8 United States (excl benefits, non financials) United Kingdom 6 Japan 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 96 98 00 02 04 06 08 10 12 14 16 18 Sources: BLS, ECB, MOF 67 C 1 - P u b l i c N a t
CPI excluding food and energy (YoY as %) United States Japan 4 4 United States (Core PCE) United Kingdom Euro zone 3 3 2 2 1 1 0 0 -1 -1 -2 -2 96 98 00 02 04 06 08 10 12 14 16 18 Sources: Datastream, Eurostat 68 C 1 - P u b l i c N a t
Profits after taxes and interest payments (as a share of GDP) United States Euro zone United Kingdom Japan 16 16 14 14 12 12 10 10 8 8 6 6 4 4 96 98 00 02 04 06 08 10 12 14 16 18 Sources : Datastream, ONS, Eurostat, MOF Japon 69 C 1 - P u b l i c N a t
Financial conditions Euro Zone Financial Variables Eurostoxx 600 index VIX index Iboxx euro coporate index Banks CDS 5Y premium index EONIA Spread 3-month Euribor - EONIA Spread 10 year Italian/German government bond 10 year German governement bond Euro trade-w eighted effective exchange rate Macro-economic variables Composite PMI Unemployment rate Core inflation Oil Price 70 C 1 - P u b l i c N a t
ECB Bank lending survey 60 -60 Credit conditions - business Credit demand - business (Rhs - reversed) 40 -40 20 -20 0 0 -20 20 -40 40 Easing in credit conditions -60 60 Increase in demand -80 80 03 05 07 09 11 13 15 17 19 Sources : Datastream, NATIXIS 71 C 1 - P u b l i c N a t
Real effective exchange rate Under/Over valuation of Real Effective Exchange Rate (REER) in relation to their 15 year average (source BIS) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% MXN TRY JPY GBP CAD MYR NOK SEK EUR ZAR HUF COP PLN RON CZK CLP AUD TWD KRW NZD IDR PEN RUB THB CHF SGD BRL USD INR PHP CNY Sources : Datastream, Natixis 72 CONTAGION TO STRIKE BACK IN 2019 ? DECEMBER 2018 C 1 - P u b l i c N a t
Exchange rates Yen/dollar (L) Yen/euro (L) 180 1,6 £/euro (R) Dollar/euro (R) 1,5 160 1,4 1,3 140 1,2 1,1 120 1,0 0,9 100 0,8 0,7 80 0,6 0,5 60 0,4 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Datastream 73 C 1 - P u b l i c N a t
Recession fears are materializing abroad • While, according to the DOTS, Fed members are willing to hike rates twice in 2019, investors are now expecting some rate cuts with a 40% probability to have one in 2019 and nearly two moves fully priced in by the end of 2020. It explains the current inversion of the 1Y 5Y segment of the $ • swap curve. USD swap curve at different dates (%) Fed funds contracts - Curve at different dates (%) 3,3 3,2 3,0 3,2 3,0 2,8 3,1 2,8 2,6 3,0 2,6 2,9 2,4 2,4 2,8 2,2 2,7 2,2 2,72 2,75 2,76 2,76 2,72 2,6 2,0 2,0 Sources : Bloomberg 2,50 2,48 2,48 2,50 2,53 2,56 2,59 2,62 2,58 2,5 1,8 1,8 2,4 01/19 04/19 07/19 10/19 01/20 04/20 07/20 10/20 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y Current levels 3m ago Current curve 1m ago 3m ago 6m ago 1m ago 6m ago 74 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Does curve inversion mean recession ? The $ curve inversion is mostly due to technical factors, the most noteworthy being : 1. The Federal Reserve rate hikes (curve flattening is the typical configuration during monetary tightening cycle); 2. The heavy supply of Treasuries bills in the US. 3. The Zero Interest Rate Policies in Europe and in Japan which forced domestic investors to buy more US treasuries; 4. Numerous geopolitical risks surrounding Europe (Brexit, Italy) and Emerging countries (Turkey, Brazil, Argentina etc.); 5. The Trade War which, coupled other risks, triggered a massive flight to quality. Probability of recession according to the NY Fed 100 1 90 1 80 1 70 1 60 1 50 1 40 0 30 0 20 0 10 0 - - 01/70 07/71 01/73 07/74 01/76 07/77 01/79 07/80 01/82 07/83 01/85 07/86 01/88 07/89 01/91 07/92 01/94 07/95 01/97 07/98 01/00 07/01 01/03 07/04 01/06 07/07 01/09 07/10 01/12 07/13 01/15 07/16 01/18 NBER recession index NY Fed recession probability 1Y ahead Source : NY Fed 75 C 1 - P u b l i c N a t
What if the Fed starts reinvesting everything ? Gross & net supply of US treasuries ($Bn) Fed USTs purchases with or without Amounts of the 30Bn cap Gross UST with without delta supply of purchased by Net supply of Adjusted net USTs the Fed USTs supply* 2019 114 269 154 2016 2 245 174 364 190 2020 82 209 127 2017 2 106 193 492 299 2021 119 174 55 2018 2 215 114 708 594 2022 103 152 49 2019 2 379 82 772 690 2023 52 166 114 2020 2 881 119 820 701 2024 3 107 104 2021 3 240 103 935 833 2025 - 90 90 2022 3 415 52 945 893 Source : Natixis 2023 3 477 3 909 906 *using Jan. 2019 CBO net funding needs SOMA - Redemptions of UST & cap Gross & net supply of USTs, using CBO's net marketable borrowing estimates (Bn $) Fed's UST purchases (3m MA) UST SOMA redemptions 70 70 Net supply (CBO net funding need estimates as Fed 30Bn cap on USTs of Jan. 2019) 4000 60 60 Gross borrowing forecasts 3500 50 50 3000 2500 40 40 2000 30 30 1500 1000 20 20 500 Sources: Natixis, CBO 10 10 0 Sources : NATIXIS 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 0 0 01/19 02/20 03/21 04/22 05/23 06/24 07/25 08/26 09/27 10/28 76 C 1 - P u b l i c N a t
Investors rule out any ECB hike in 2019 Rate hike expectations for the Deposit Rate have been cut down • to 5bp max for next year, the first move being expected in May 2020 (smallest hike would be +10bp). • The first 25bp hike is fully now expected in early 2021 which means that investors don’t believe in the CB capacity to increase its interest rates. • Risks are now highly asymmetrical and tilted on the upside. Natixis survey (Jan. 2019) Forward eonias and deposit rate increase expected in bp When do you expect the first Implied rise in Eonia fwds deposit rate (bp) ECB hike (deposit/repo)? 0,30 25 +15bp August 2020 Later 13% 19 19 21 Implied deposit rate increase as 0,20 of 04/02 20 0,10 15 16 H2-20 19% 15 0,00 12 +4bp Dec 19 10 11 -0,10 10 8 H1-20 8 45% 6 -0,20 4 4 5 3 2 2 -0,30 H2-19 24% 1 0 Sources : NATIXIS -0,40 0 06/19 10/19 02/20 06/20 10/20 0% 10% 20% 30% 40% 50% 77 C 1 - P u b l i c N a t
ECB road map 78 C 1 - P u b l i c N a t
ECB’s reinvestment policy : gross purchases will be down by 54% in 2019 & CSPP to suffer the most Gross purchases of bonds by the Reinvestments for the coming year Eurosystem (Bn) 35 35 Reinvestments (Bn) PSPP CSPP CBPP3 60 60 Net purchases (Bn) 30 30 ABSPP 3m average Gross purchases (Bn, 3m avg.) 50 50 25 25 40 40 20 20 30 30 15 15 20 20 10 10 10 10 5 5 - 0 - - 01/19 04/19 07/19 10/19 01/20 Eurosystem bonds purchases (Bn) - 2018 2019 2018 vs 2019 % of APP** - January Net Gross Net Gross Gross 2018 2019 2018 2019 delta PSPP 240 356 0 177 -50% 77% 83% PSPP 21 25 18% CSPP 48 52 0 6 -88% 11% 3% CSPP 1 2 181% CBPP3 24 42 0 22 -47% 9% 11% CBPP3 3 4 30% ABSPP 3 10 0 7 - 2% 3% ABSPP 1 1 -11% Total 314 461 0 212 -54% - - Total 26 32 24% Source : Natixis *calculated on gross purchases 79 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
The evolution of the ECB’s reinvestment policy • The new capital key will be the targeted allocation for the PSPP. Given current deviations, the Eurosystem will have to buy less BTP, SPGB, OAT and more OT, SLOVGB or German Bunds. • Reinvestment of principal redemptions over the entire year to allow for a regular & balanced market presence during the reinvestment phase • No twist in Europe & guideline to buy above deposit rate. Theoretically, PSPP holdings should now remain stable. However, given the • inability to reinvest all redemptions, deviations tend to increase. Looking at Jan. 2019 purchases, one should buy some SPGB & sell some BTPs. The use of the new capital key is a bad news for Spain & Italy How PSPP holdings moved in January 2019 ? 25 20 4 3,3 11 10 9 20 8 2,5 3 6 5 4 10 4 15 3 3 2 1 0 2 -1 10 0 0,4 1 5 0,3 0,3 0,2 0,2 0 0 -16 -10 -5 -19 -1 -10 -20 -2 -1,6 -15 -31 Targeted deviations given the capital key change (Bn) -3 -20 -30 Current deviations vs previous K key (Bn) -2,8 -3,1 -4 -25 Needed corrections to respect the new key -30 -40 Sources : Natixis,Bloomberg 80 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Who will replace Mario Draghi ? The economists POV However, his mandate will end in Dec. 2019 February ( ), August ( ) & December 2018 scores Source : Bloomberg (according to a survey in which 24 economists took part) 81 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Rate forecasts Germany 29/12/2017 31/12/2018 30/01/2019 Yields & spreads (end of period) Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 2-Year -0,66 -0,59 -0,56 -0,55 -0,49 -0,36 -0,18 0,07 0,16 Fwd - - - -0,54 -0,52 -0,51 -0,49 -0,45 -0,39 5-year -0,20 -0,31 -0,29 -0,22 -0,14 -0,01 0,15 0,38 0,46 Fwd - - - -0,27 -0,24 -0,20 -0,16 -0,12 -0,06 10-year 0,42 0,24 0,19 0,30 0,39 0,50 0,65 0,83 0,90 Fwd - - - 0,22 0,26 0,30 0,35 0,39 0,43 30-year 1,24 0,88 0,78 0,89 0,96 1,06 1,19 1,35 1,41 - - - Fwd 0,81 0,82 0,84 0,85 0,87 0,88 2Y - 5Y 46 28 27 33 35 35 33 31 30 2Y - 10Y 108 83 75 85 88 86 83 76 74 10Y - 30Y 82 63 59 59 57 56 54 52 51 Sovereign spreads 29/12/2017 31/12/2018 30/01/2019 10Y spreads, in bp (end of period) Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 OAT - BUND 34 47 41 47 48 45 41 40 38 BTP - BUND 153 250 241 265 285 260 230 220 210 BONO - BUND 110 117 107 126 131 125 117 114 112 United States 12/29/17 12/31/18 01/28/19 Sovereign yields & spreads (end of period) Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 2-year 1,91 2,49 2,59 2,75 2,85 2,80 2,75 2,80 2,80 Fwd - - - 2,62 2,61 2,59 2,58 2,57 2,57 5-year 2,24 2,51 2,58 2,70 2,75 2,75 2,70 2,70 2,75 Fwd - - - 2,62 2,63 2,64 2,65 2,66 2,67 10-year 2,43 2,68 2,74 2,85 2,95 2,90 2,90 2,85 2,80 Fwd - - - 2,78 2,80 2,81 2,83 2,84 2,86 30-year 2,76 3,01 3,07 3,05 3,25 3,30 3,25 3,25 3,25 Fwd - - - 3,07 3,08 3,08 3,09 3,10 3,10 2Y - 5Y 33 2 -1 -5 -10 -5 -5 -10 -5 2Y - 10Y 52 20 15 10 10 10 15 5 0 10Y - 30Y 33 33 32 20 30 40 35 40 45 82 C 1 - P u b l i c N a t
Supply demands The scissor effect 83 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
8 ASSET CLASSES 84 OUTLOOK RATES 2019 C 1 - P u b l i c N a t
Total return in local currencies Total return in local currencies YTD (28-Feb) 2018 2017 11,5 -4,4 21,8 Equities SPX 10,7 -10,8 10,6 STOXX FTSE 6,0 -8,7 11,9 TOPIX 7,6 -16,0 22,2 9,0 -14,2 37,8 MSCI EM $ 0,4 0,4 2,8 Govies Govies US Govies Core Euro 0,7 1,8 -0,4 0,8 0,5 0,9 Govies Periph Euro 0,1 0,7 1,8 Govies UK Linkers EUR 0,0 -1,5 1,4 -0,7 -2,3 -0,09 B/E Inflation EUR 1,8 -1,3 2,4 Credit IG EUR 2,5 -2,2 6,5 IG US HY EUR 4,1 -3,6 6,7 6,4 -2,3 7,5 HY US 4,3 -6,2 15,2 GBI EM $ EMBI Div.$ 5,4 -4,3 10,3 22,0 -17,1 6,4 Cdties Energy 2,4 -3,6 12,0 Precious 8,6 -18,0 29,1 Industrial -0,4 -4,8 13,8 FX EUR/USD 4,9 -1,2 -4,0 GBP/EUR 4,4 -5,5 9,8 GBP/USD 0,9 -2,3 -3,8 USD/JPY -2,6 5,4 -6,3 USD/CNY 1,5 -10,0 5,7 EM/USD DXY 0,0 4,4 -9,9 Sources: Datastream, Bloomberg, NATIXIS. 85 C 1 - P u b l i c N a t
Foreign exchange rates 12/29/17 12/31/18 02/27/19 G10 (end of period) Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 EUR/USD 1,20 1,15 1,14 1,15 1,17 1,20 1,22 1,23 1,24 EUR/GBP 0,89 0,90 0,85 0,86 0,87 0,88 0,88 0,89 0,89 EUR/CHF 1,17 1,13 1,14 1,14 1,14 1,15 1,16 1,17 1,18 EUR/SEK 9,83 10,16 10,54 10,40 10,25 10,20 10,05 9,95 9,80 EUR/NOK 9,84 9,96 9,72 9,60 9,55 9,45 9,30 9,20 9,10 GBP/USD 1,35 1,28 1,33 1,33 1,35 1,37 1,38 1,39 1,39 USD/JPY 113 110 111 109 108 107 106 105 105 USD/CNY 6,51 6,88 6,69 6,75 6,70 6,65 6,65 6,60 6,60 Sources: Bloomberg, Natixis 12/29/17 12/31/18 02/27/19 (end of period) Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 USD/KRW 1 067 1 111 1 119 1 120 1 120 1 115 1 110 1 090 1 080 USD/INR 63,9 69,8 71,2 72,0 72,0 71,0 71,0 70,5 70,0 USD/BRL 3,31 3,88 3,73 3,70 3,65 3,55 3,50 3,45 3,45 USD/MXN 19,7 19,6 19,2 19,0 19,0 18,8 18,6 18,5 18,5 USD/CAD 1,26 1,36 1,32 1,32 1,31 1,30 1,29 1,27 1,25 AUD/USD 0,78 0,70 0,71 0,72 0,73 0,73 0,74 0,74 0,75 NZD/USD 0,71 0,67 0,68 0,70 0,70 0,71 0,72 0,72 0,73 USD/ARS 18,6 37,7 38,8 39,0 38,0 37,0 37,0 36,0 36,0 Sources: Bloomberg, Natixis 86 C 1 - P u b l i c N a t
Commodity market 12/29/17 12/31/18 02/27/19 Energy prices (end of period) Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Brent spot 66,7 50,6 65,5 69 77 74 72 79 74 - - - 66,5 66,2 65,8 65,5 64,9 64,5 Future WTI spot 60,5 45,2 56,9 59 67 66 65 73 68 - - - Future 57,9 59,0 59,1 58,7 58,3 57,7 Sources: Bloomberg, Natixis 12/29/17 12/31/18 02/27/19 Metals Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Gold 1 303 1 281 1 322 1 315 1 360 1 380 1 388 1 395 1 403 Silver 16,9 15,5 15,9 15,9 16,9 17,3 17,5 17,6 17,8 Platinum 927 794 868 843 873 883 885 890 895 Palladium 1 056 1 263 1 558 1 175 1 065 1 038 1 048 1 055 1063 Aluminum 2 025 2 258 1 823 1 893 2 038 2 088 2 100 2 075 2 025 Copper 7 219 5 961 6 512 6 500 6 625 6 725 6 900 7 000 7 100 Nickel 12 714 10 623 12 901 13 125 13 500 13 625 14 000 14 275 14 400 Zinc 2 575 3 335 2 483 2 762 2 725 2 725 2 675 2 625 2 600 87 C 1 - P u b l i c N a t
Equity and Credit forecasts Equity indices 29/12/2017 31/12/2018 27/02/2019 Main indices (end of period) Dec-19 S&P 500 2 674 2 507 2 792 -- 2 850 QoQ Growth - - - -- 2,1% EURO STOXX 50 3 504 3 001 3 283 -- 3 320 QoQ Growth - - - -- 1,1% -- 11 550 DAX 12 918 10 559 11 487 QoQ Growth - - - -- 0,5% 5 300 CAC 40 5 313 4 731 5 225 -- QoQ Growth - - - -- 1,4% Sources: Bloomberg, Natixis Credit Spreads 12/29/17 12/31/18 01/04/19 EUR Spreads (bp, end of period) Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Investment Grade 38 91 95 90 90 86 88 90 High Yield 248 437 453 420 409 420 428 430 US Spreads (bp, end of period) Investment Grade 106 157 159 155 150 157 165 165 High Yield 358 533 505 495 484 520 548 550 88 C 1 - P u b l i c N a t
Stock market index (100 in 2004:1) Eurostoxx Nikkei S&P FTSE 280 280 260 260 240 240 220 220 200 200 180 180 160 160 140 140 120 120 100 100 80 80 60 60 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Datastream 89 C 1 - P u b l i c N a t
Risk premium 9 9 S&P Nikkei Eurostoxx 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 93 95 97 99 01 03 05 07 09 11 13 15 17 19 Source: Facset 90 C 1 - P u b l i c N a t
Dear stocks? 91 C 1 - P u b l i c N a t
Upgrades vs downgrades: Investment Grade (on 3 months average) United States Euro zone (*) The statistic is normalized 1,0 1,0 between +1 et -1, being calculated as (U-D)/(U+D). A negative figure 0,8 denotes a worsening of credit 0,8 quality. On the contrary, a positive figure indicates an improvement of 0,6 0,6 credit quality. 0,4 0,4 0,2 0,2 0,0 0,0 -0,2 -0,2 -0,4 -0,4 -0,6 -0,6 -0,8 -0,8 -1,0 -1,0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Natixis Calcul 92 C 1 - P u b l i c N a t
Euro Zone: Credit spreads vs swaps High Yield (LHS) BBB (ex autos since 2003, RHS) 1700 450 A (RHS) 400 1500 350 1300 300 1100 250 900 200 700 150 500 100 300 50 100 0 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Sources: Datastream, IBOXX Natixis 93 C 1 - P u b l i c N a t
United States: Credit spreads vs swaps High Yield (LHS) BBB (RHS) A (RHS) 1600 700 1500 650 1400 600 1300 550 1200 500 1100 450 1000 400 900 350 800 300 700 250 600 200 500 150 400 100 300 50 200 0 100 -50 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Datastream 94 C 1 - P u b l i c N a t
Default rate 'corporate' 16 16 United States : total corporate United States : high yield corporate Euro zone : high yield corporate 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 97 99 01 03 05 07 09 11 13 15 17 19 Source : M oody's 95 C 1 - P u b l i c N a t
Non-performing loans (as % of total loans) 50 50 Germany France Spain 45 45 40 40 Italy Greece Netherlands 35 35 Ireland Portugal 30 30 25 25 20 20 15 15 10 10 5 5 0 0 96 98 00 02 04 06 08 10 12 14 16 18 Sources : Datastream, World Bank, IMF, NATIXIS 96 C 1 - P u b l i c N a t
Credit allocation for 2019 Non-Fin Senior Insurance Sub Corp. hybrids Bank senior Non-preferred Bank senior HY Non fin Risk factor Bank AT1 preferred Bank T2 Average Weight US HY US IG CB Structural risks 1.5 0.5 -0.5 -1.0 -2.0 -1.0 0.0 -1.5 -1.5 0.0 -1.5 -0.3 5% Trend in credit quality 0.0 0.5 1.0 0.5 0.0 0.5 0.0 -0.5 -0.5 -1.0 -1.0 -0.1 10% Idiosyncratic and default risks 2.0 0.5 -0.5 -0.5 -2.0 -2.0 1.0 -2.0 -1.5 0.0 -2.0 -0.1 10% Relative value (fair value) -1.5 0.5 0.0 0.0 1.5 1.0 0.5 1.5 0.0 0.5 -2.0 0.0 15% Search for Yield/Spread -2.0 -1.5 0.0 1.0 2.0 1.5 -0.5 1.0 1.5 0.0 1.0 -0.1 10% Spread/volatility arbitrage 0.0 0.0 -0.3 0.5 -0.5 -1.0 -0.3 0.3 1.5 0.0 2.0 0.2 5% Political risk 0.5 0.0 -0.5 -1.0 -1.5 -1.0 0.5 -0.5 -1.0 0.0 0.0 -0.2 10% Central banks' policy risk -1.5 0.0 0.5 1.0 1.0 1.0 -1.5 -0.5 -0.5 0.5 0.5 -0.3 10% Trade war / Macro & Risk aversion 1.5 0.5 -0.5 -1.0 -2.0 -1.5 0.0 -1.5 -1.5 -1.0 -2.0 -0.4 15% Technicals, incl. Supply/Redemptions -1.5 -2.0 -1.0 2.0 0.5 0.0 -1.0 0.5 1.0 0.0 2.0 -0.3 10% Score -17.5 -7.5 -16.3 12.5 -20.0 -17.5 -8.8 -26.3 -32.5 -12.5 -52.4 -17.2 100% Allocation H1-19 MW OW MW OW MW MW OW UW UW MW UW 97 C 1 - P u b l i c N a t
Risk premium 9 9 S&P Nikkei Eurostoxx 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 93 95 97 99 01 03 05 07 09 11 13 15 17 19 Source: Facset 98 C 1 - P u b l i c N a t
Asset performance ahead of recession 99 C 1 - P u b l i c N a t
Dividend Yield -10Y Treasury 100 C 1 - P u b l i c N a t
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