Global risk aversion to dominate – Westpac

Analysts at Westpac suggest that risk aversion is the name of the game as we begin the week.

Key Quotes

“While it is difficult to calibrate the longevity of market concerns around Turkey, and what the magnitude of any ongoing risk aversion would mean for US 10yr yields, we think that the broader yield ranges that have prevailed throughout 2018 will not be broken. However it all depends on whether the focus on Turkey will be short-lived, as was the situation with Italy in May, or a much longer driver of market sentiment and price action, as for example, the previous problems Greece.”

“This is not the forum to discuss all of the potential exposures of the European banking system, the geopolitics within NATO or the potential for contagion to other emerging markets, however with those uncertainties in mind it is difficult to properly assess risk rewards for US Treasuries.”

“Even so, would expect 10yr yields to well supported at 2.80% and, below that, the 2.75% level is key. Beyond that we think price action would reflect a significant re-assessment of the 2018 Fed hike potential, with growing around a further hike beyond September. That would support a more extended bond rally but for now is not our central scenario. So we expect that the market will be better sellers into the rally, although we imagine new contrary positioning would be limited, and tight stops adopted.”

“The offset to a more bearish outlook is the fact that speculative futures shorts remain large and, after last weeks auctions, near term fears around ongoing issuance will have abated for now.”