The first clip was opened at 0.925%, the second clip at 1.05%.
Average entry is 0.99%. The position is closed with an average loss of 22bp including roll down and trading costs.
Flush-out in low-for-long positions after FOMC meeting
Earlier today, our recommendation to receive in the short-end of the EUR swap curve reached our stop-out level as the sell-off initiated by the FOMC last night rubbed off on European markets right from the opening. The EUR money market curve steepened significantly as positioning in low-for-long trades obviously was bad.
Levels looking stretched, but markets remain fragile
Looking at the EONIA forward curve, the market is now assuming full normalisation of liquidity conditions by late 2014. Further, the market is pricing in more than one rate hike of 25bp in the refi rate by end 2015. This appears stretched taking the large negative output gap and the subdued inflation outlook into account. However as the move higher in rates mostly seems driven by a flush-out of “low-for-long” positions it is hard to tell how much further it can run.
Although the selling pressure should cause some nervousness within the ECB, as it in particular hurts the peripheral markets, we do not believe the ECB will step in and accommodate it as long as data is gradually improving. In this light today’s PMI release probably gives some comfort to the ECB, as overall it improved for a second month, and as forward looking indicators suggest that further improvement could be expected over the summer.
Overall, we believe that markets remain fragile, and we prefer standing on the sidelines right now.
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