Investors in Summer Planning Mode Seek Lagarde’s Sunny Outlook

(Bloomberg) -- Investors will be looking for evidence next week that the euro area is in the “good place” described by European Central Bank President Christine Lagarde.

Bond market sentiment will be driven on Monday by the outcome of talks between European leaders Saturday on a recovery fund, after officials played down the chances of success. While traders aren’t betting on a deal just yet, Lagarde said the ECB’s policy was based on getting one.

Markets are relying on the ECB’s stimulus to make up for any delay, and that’s been reflected in recent gains for Italy’s debt. Any breakthrough could reduce the spread between Italian and German bonds -- a barometer of risk -- by up to 10 basis points, Citigroup Inc. said. Any watering down of grants in the fund could widen it by 30 basis points.

By the end of the week, the focus will have switched to data, with forward-looking purchasing managers numbers due for July across the region. They should show whether the economic recovery is being dented by fears of a second virus wave.

That could wake up a market where trading volumes in German and Italian bond futures are close to the lowest in more than three years, as investors take their summer breaks. Such spells of poor liquidity in the past have had a tendency to exacerbate price moves, though many funds are taking no chances.

“Most accounts seem to be partially or fully hedged ahead of the summer, having added risk-off hedges,” said Jamie Costero, a rates strategist at UBS Group AG.

Slow Down

The euro area’s bond sales slow down next week, with only Germany and Portugal set to sell debt. France will pay almost 29 billion euros ($33 billion) in bond redemptions and coupons.

The U.K. will hold three regular gilt auctions and one inflation-linked bond sale, and buy back securities at the steady rate of 1.15 billion ($1.44 billion) pounds per operation.

• Euro-area publishes July’s consumer confidence figures Thursday
• Euro-area, German, U.K. and French preliminary manufacturing and services PMI data for July are due Friday
  • U.K. retail sales figures for June will be released the same day
• ECB policy maker speeches are thin on the ground next week with only Philip Lane and Luis de Guindos scheduled to speak; investors will be keen to hear Lane’s view on whether the full bond-buying armory will be used
  • BOE policy makers are slightly busier with investors hoping to glean views on negative interest rates from Andy Haldane, Silvana Tenreyro and Jonathan Haskel
• Fitch Ratings reviews Greece, Finland, ESM, EFSF, Moody’s Investors Service also reviews Finland, DBRS Ltd. reviews ESM, EFSF as well as the Netherlands on Friday

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