SSA Market: Trumping up the pressure – Rabobank

Research Team at Rabobank, suggests that the notable bear steepening in core European govvie and SSA curves since Donald Trump’s surprising election victory continues to test the market’s collective resolve.

Key Quotes

“In Europe, core government yields have drifted higher with 10 yr France and Germany up 32bps and 15bps, respectively. Unable to escape the market’s rising concern that the reflation trade has begun, yields of core SSAs have been dragged along for the ride - 10 yr UNEDIC (0.625% 03/26) and KFW (0.375% 09/26) are 22bps and 14bps higher, respectively.”

“The longer-term implications of the US elections are contingent on the balance that is struck between Mr Trump’s pledge of fiscal pump priming (bearish in that this underpins the notion of reflation) and his apparent protectionist bent (bullish as a global trade war stands to weigh on trade volumes which the WTO expects to dip below global nominal GDP growth for the first time in 15 yrs next year and, by extension underpin disinflationary pressures).”

“Last week’s events do question our long-held bullish thesis. This, hinges upon the notion that a recovery of demand-pull inflation in the advanced world is being stymied by what we argue is a post-crisis policy related misallocation of resources (simply put, the slavish focus of unconventional monetary policy on asset valuations serving to divert gross profit away from “real world” productive investment into the increasingly abstract financial universe). This framework, we argue, provides a plausible means of explaining the conspicuous lack of investment demand in the developed world, the “puzzlingly” limited productivity growth and, by extension, limited wage growth.”

“The associated volatility has promoted an understandable degree of selling, the longevity of which is a challenge to accurately assess in the absence of any clarity as regards Mr Trumps true intentions. With the ECB expected to extend the PSPP and European growth and productivity weak, a more cautious tone from the President-elect could be expected to see curves flatten anew.”