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ANZ - NZ Economics, Market Focus

SUMMARY

The relief rally post the EU summit was short-lived, and while the agreement has managed to avoid an immediate financial meltdown, scepticism remains high. Even with fairly successful German, Spanish and Italian debt auctions during the week and improving US data, markets are not prepared to take on much risk over the Christmas break. This has seen NZ interest rate markets rally hard into the year's end and the curve flatten amongst thin liquidity.

THEMES

- The Euro debt crisis dictates. A mountain of Italian debt issuance in 2012 and the likelihood of further rating downgrades by the ratings agencies has seen markets pricing in even more bad news.

- Q3 GDP rounds off the final major NZ data release for the year. Whatever the result, markets will soon focus back on offshore headlines.

- US data continues to print during the break. US releases are constant during the break with ISM, Factory Orders and Non-Farm payrolls likely to maintain volatility in long end global rates.

DATA PULSE
PREFERRED STRATEGIES - INVESTORS

The relief rally we expected after the European summit did not last long and instead markets have rallied hard on lingering concerns. We recommend preparing to lighten up on long duration positions, particularly in the mid curve which has seen significant out- performance driven by flow.

PREFERRED STRATEGIES - BORROWERS

We maintain our preference for keeping the duration of hedges short. Prepare for risk-off rallies and use these to average into hedge positions and extend small shorts into mid curve, as carry is not overly prohibitive and rates are at historic lows.

While we consider the risk of negative shocks to be high, it is also prudent to increase some cover at these levels.

Dated: 19 December, 2011