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f739c20f2081a66a676cce161593bd0da5fd95f82a2abe792f6023717552c8ee;;[{"layout":"detailed","uid":27853,"publicationDate":"05 May 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183202.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJJAYtfRRuP-QLTUBMUApBX0=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - Fragmentation or not? Yes, and the ECB should not dismiss it","titleDe":"","titleIt":"","product":"Chart of the Week","synopsis":"<ul class=\"ucrBullets\"><li> The spread between the GDP-weighted sovereign yields and the OIS curve has been frequently used by the ECB during the pandemic to assess the degree of market fragmentation. The PEPP was launched based on this indicator and the central bank used to monitor it closely. As our chart shows, the GDP-weighted 10Y yield spread vs. OIS has moved sideways so far this year. On the surface, this suggests that everything is fine in the fragmentation camp.<\/li><li> However, such an average indicator hinders a tremendous heterogeneity at the country level. In the current risk-off environment, core EGBs have outperformed OIS, while traditional high-beta issuers (Italy for example) have widened versus OIS. This is reflected in a meaningful widening in the BTP-Bund spread, which has approached 200bp at the 10Y. Notably, BTP underperformance does not seem to be related to idiosyncratic issues (higher deficit or political uncertainty), as in past episodes, but mainly to the effect of a less supportive monetary-policy stance at a time when the Russia-Ukraine conflict is weighing on growth prospects.<\/li><li> Widening in spreads to Bunds should be a flashing signal for the ECB because it is a stark reminder that sovereigns, banks and corporates in various jurisdictions are facing increasingly different funding costs. A one-size-fits-all approach is not appropriate in the current environment, and the ECB should not dismiss the latest developments in fragmentation.<\/li><li> We are probably in for some more volatility in BTPs in the short term. First, the ECB may take some complacency from the fact that BTP widening versus OIS has been more limited than versus Bunds. Secondly, the ECB may be reluctant to abandon the gauge of fragmentation it endorsed during the pandemic. Lastly, the ECB is likely to be in a difficult position because sovereign risk repricing is not widespread, which would be a straightforward reason for intervening, but focused on a small subset of countries.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Luca","last":"Cazzulani","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=39&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=44e3fa0de8cdd1ffaea59e3843112f22"}],"hash":"f739c20f2081a66a676cce161593bd0da5fd95f82a2abe792f6023717552c8ee","available":"0","settings":{"layout":"detailed","size":"default","showanalysts":"2","showcompanies":"2","showcountries":"2","showcurrencies":"2","nodate":"0","notitle":"0","noproduct":"0","noflags":"0","dateformat":"d M y","nolinktitle":"0","synopsislength":"300","synopsisexpand":"1","shownav":"0","oldestedition":"","limit":"5"}},{"layout":"detailed","uid":27730,"publicationDate":"13 Apr 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183037.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJIXgDTO8o1UFj4mn7kR7n34=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - Forwards project curve inversion in the euro area: Excessive policy expectations or underpricing of duration risk?","titleDe":"","titleIt":"","product":"Chart of the Week","synopsis":"<ul class=\"ucrBullets\"><li> Markets are entering the April ECB meeting with very hawkish expectations. One-month OIS forwards project the depo rate will be at 0% at end-2022 and at 1.40% at the end of 2023, significantly higher compared to its current level of -0.50%. Since the ECB meeting on 10 March, these forward levels have shifted upward significantly, mirroring a strong rise in 2Y OIS swap rates. Even considering that investors tend to be risk-averse and hence a certain amount of risk premium is embedded in forwards, a substantial amount of rate hikes seems to be priced in.<\/li><li> While OIS forwards indicate a combination of steep rate-hike expectations and risk premium at the short end, forwards for Bund yields are considerably flatter. Markets price in an inversion between the depo and the 10Y Bund yield starting from June 2023 and reaching 40bp by December 2023. Relative to the historical experience since the start of the euro, this is sizable. The 10Y Bund yield was some 10bp lower than the ECB rate in March 2001 (at the peak of the tightening cycle) and some 20-30bp lower after the hike in June 2008. The curve was not inverted at the peak of the 2011 mini cycle. <\/li><li> Markets seem to be pricing in a central bank strongly committed to fighting inflation, that hikes rates along a steep trajectory and is successful in stabilizing inflation in the long run, possibly with a negative impact on growth. In this context, 10Y Bund yields are projected to stabilize at around 1%. This outcome could materialize as long as ECB rates of over 1% are not seen as an equilibrium but as a transitory peak. Indeed, our view is that the ECB will deliver fewer hikes than what OIS forward are pricing in. In this respect, forwards suggest that markets are demanding a larger risk premium for holding ECB risk rather than for holding duration risk. Therefore, receiving 2Y swaps is attractive compared to holding long-maturity Bunds.<\/li><li> Aside from a possible brief inversion at the peak of the tightening cycle, it is unlikely that the 10Y Bund will trade lower than the depo as an equilibrium, particularly as QE is now coming to an end, thus limiting the scarcity effect going forward. As such, either money market forwards are exaggerated, or forwards are underpricing risks associated with 10Y Bunds. Indeed, the risk scenario here would be that the equilibrium level for policy rates in the euro area is above the 1% area, in which case, the long end of the Bund curve would need to adjust upward.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Luca","last":"Cazzulani","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=39&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=44e3fa0de8cdd1ffaea59e3843112f22"}],"countries":[{"name":"Euroland","ticker":"","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=25&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=fd74dfc966e72d45ff2580813616e07a"},{"name":"Europe","ticker":"","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=26&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=253d12e5521ae4b9a73e892ee04713f2"}]},{"layout":"detailed","uid":27293,"publicationDate":"21 Feb 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/fxfistrategy_docs_2022_182540.ashx?EXT=pdf&KEY=KZGTuQCn4lsvclJnUgseVIRKs7N21TUl3sJw4zbJbKwbrbd13F_JQw==&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Rates Perspectives - EUR swap spreads are rich by our fair value model","titleDe":"","titleIt":"","product":"Rates Perspectives","synopsis":"<ul class=\"ucrBullets\"><li> Swap spreads have been very volatile in February. Expectations of ECB rate hikes have gained momentum, prompting investors to hedge their interest rate risk more actively, while healthy demand for collateral has slowed down the rise in Bund yields.<\/li><li> The rolling correlation between swap spreads and Bund yields has been consistently negative over time. The recent widening of swap spreads that occurred alongside rising yields has been driven more by flows than by fundamentals.<\/li><li> Our model indicates that the fair value for the 10Y EUR swap spread is 35bp. Based on our expectations for the key drivers of the model, we expect the fair value to decline to around 30bp later this year. By this metric, the 10Y swap spread is some 25bp too expensive.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Luca","last":"Cazzulani","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=39&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=44e3fa0de8cdd1ffaea59e3843112f22"}]},{"layout":"detailed","uid":26914,"publicationDate":"22 Dec 21","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/fxfistrategy_docs_2021_182037.ashx?EXT=pdf&KEY=KZGTuQCn4lsvclJnUgseVCsY1pNwWYpSeN7QVT9NIgfs0wGw0dvVmg==&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Rates Perspectives - Italy\u00b4s funding in 2022: Supply to remain robust at the extra-long end","titleDe":"","titleIt":"","product":"Rates Perspectives","synopsis":"<ul class=\"ucrBullets\"><li> Italy\u00b4s 2022 gross funding needs are expected to be EUR\u00a0330bn. We expect EUR 300bn of gross M\/L term debt supply (excluding buybacks, retail and international bonds).<\/li><li> Cash deficit is expected to be EUR 100bn, with risks to the downside, and should be covered by EUR\u00a073bn in net issuance of M\/L term debt, EUR 23bn from EU funds and EUR 14bn from retail\/international bonds. We pencil in negative net BOT issuance (EUR -10bn).<\/li><li> ECB net purchases are expected to be EUR 60bn (75% of net issuance), providing less support than in 2021, when purchases were around 170% of net issuance.<\/li><li> Italy aims to keep increasing the average life of its debt by reducing the share of funding at the shorter tenors and increasing it at the extra-long end.<\/li><li><strong> Our favorite supply-related trades are: <\/strong> long 5Y and 10Y BTPs vs. 7Y BTPs, a 10\/30Y BTP steepener, short CCTeu Apr29 in ASW vs. BTPs and long BTPei May30 vs. BTPei May26.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Luca","last":"Cazzulani","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=39&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=44e3fa0de8cdd1ffaea59e3843112f22"},{"first":"Francesco Maria","last":"Di Bella","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=131&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=28af0fd2e8ef8c37a4854c55e529c47a"}],"countries":[{"name":"Italy","ticker":"IT","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=5&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=39d7224c0452f3251d42f8f8656acb2b"}]},{"layout":"detailed","uid":26840,"publicationDate":"10 Dec 21","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2021_181953.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJB6dDKN-ZlwQwmzPU8IXdJ8=&T=1","protectedFileLinkDe":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2021_182038.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJBcmVMUvH8DWSidpqkZAj_U=&T=1&T=1","protectedFileLinkIt":""},"title":"UniCredit Macro & Markets - 2022-23 Outlook: A bumpy road towards normalization","titleDe":"","titleIt":"","product":"Macro & Markets","synopsis":"<p><ul class=\"ucrBullets\"><li><strong>Macro: <\/strong> We are lowering our global GDP growth forecast for 2022 to 4.2%, as supply bottlenecks and higher inflation last for longer than anticipated. The US will likely recover its pre-pandemic GDP trend by 4Q22, while the eurozone might get there a year later. Monetary policy will gradually normalize. We expect the Fed to hike rates twice next year and three times in 2023. The ECB\u2019s QE will likely continue at a slower pace into 2023, with no change in policy rates.<\/p><\/li><\/ul><p><ul class=\"ucrBullets\"><li><strong>FI: <\/strong> UST yields are likely to drift upwards accompanied by a long-lasting bear-flattening trend. Bund yields should remain low, with the yield curve showing a modest bear-steepening as ECB purchases gradually decline. Pulled by diverging forces, the 10Y BTP-Bund spread will probably trade around 125bp.<\/p><\/li><\/ul><p><ul class=\"ucrBullets\"><li><strong>FX: <\/strong> Interest-rate differentials are set to remain the major driver of FX. In G10, we like the USD, GBP, NOK and the commodity currencies against the EUR, JPY, CHF and SEK. New COVID-19 developments may add volatility but are unlikely to prevent EUR-USD from dropping to 1.10 and below.<\/p><\/li><\/ul><p><ul class=\"ucrBullets\"><li><strong>Equities: <\/strong> European equities have the potential to grow by about 10% in 2022, mainly supported by solid earnings growth, while volatility may remain elevated over the next few months, as uncertainty surrounding COVID-19, high inflation rates and the policy response of central banks is likely to persist.<\/p><\/li><\/ul><p><ul class=\"ucrBullets\"><li><strong>Credit: <\/strong> We expect European corporate credit spreads will tighten by the end of 2022. Rising inflation, higher yields, supply-chain frictions and pandemic developments are the main challenges but their impact on performance is expected to be contained by supportive technical factors.<\/p><\/li><\/ul>","synopsisDe":"","synopsisIt":""}]


Dr. Luca Cazzulani
Head of Strategy Research
FI Strategist
UniCredit Bank, Milan
Piazza Gae Aulenti, 4 - Tower C - MRE6R
I-20154 Milan
+39 02 8862-0640

Luca Cazzulani is UniCredit’s Co-Head of Strategy Research and an FI strategist. He covers market dynamics with a particular focus on the EMU. Luca has an MSc in Econometrics  from the ...

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