IDEA of the month: Shorting the Eurozone bonds and buying commodities
With this issue we sell the 20% iBoxx Euro Germany Index and we buy t he Short IBOXX Eurozone sovereign Eurozone TR index with 10% weight and we buy the DBLCI OY Balanced Commodity Index with 10% weight. With this move we return closer to the positions we owned until mid-march……
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Directly after the Japan catastrophe we had expected a longer term shift to safety and into the bond market. This trend was indeed visible in the first days after the Japan catastrophe, but bond yields bottomed soon and started to rise again. We expect continuing rising bond yields supported by 3 rate hikes of the ECB in 2011, starting in April. Our economists expect the German 10-year interest rate to continue to rise to 3.5% in 3 months and to 4.1% in 12 months.
Furthermore, we buy the DBLCI OY Balanced Commodity Index with 10% weight. Inflows into commodities are now at a new all time high. We expect this trend to continue for several reasons: 1) investors attempt to exploit strong EM growth, 2) the risks of higher inflation ahead and 3) as a hedge against tail events. Our commodity analysts have recently increased their oil forecasts significantly by 16% to US-$ 117 (2011E average for Brent oil).
Over the last days the equity market has recovered to Dec 2010 levels. We position our portfolio more cyclical via commodities rather than equities due short term downside risks, in our view: 1) a further rising oil price due to political unrest in the Arab region, 2) a worsening of the situation in Japan (today our economist has downgraded Japanese GDP growth 2011 to -2.0% and Japanese 2011 earnings by 15%) and global production disruptions due to missing parts from
Japanese suppliers (especially Auto secto r), and 3) an escalation of the peripheral issues in the Eurozone. Therefore we stick to our low net equity weight of 0% for now.
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Source: Trading Ideas ETF: Ideas and Flows – Deutsche Bank AG