Top Trade Ideas 2017 from Credit Suisse

If you wish to receive trade ideas from Credit Suisse and other tier 1 investment banks on a regular basis, subscribe now or get a free 5-day trial here.

Trade Ideas 2017 from Credit Suisse

Global FX Strategy

2017 Core Views

  • Widening rate differentials, political risk in continental Europe and potentially a corporate profit repatriation holiday in the US are all likely to keep the USD supported against most G10 and EM FX in 2017.
  • A protectionist turn in the incoming US administration’s trade policy would likely reinforce our bullish take on the USD as a first reaction, given the heavy weight of CAD and MXN in the USD broad index.
  • The increase in US international leverage poses a key risk to a stronger dollar view as rising yields might generate higher coupon payment outflows to foreign holders of US debt, resulting in a rapid deterioration of the US’ income balance.
  • A strong political message from the incoming US administration against further USD strength would also raise the risk of a sharp pull-back, making it hard to trade on persistent USD strength throughout 2017. Relatively high implied volatility means FX options are not cheap either.
  • As such we recommend trades that do not make a direct play on the greenback and give investors some scope for risk diversification. Our trades are pro-carry and also sell implied volatility, which are non-consensus approaches at a time of rising funding costs and perceived high political risk.

2017 Trade Ideas

  • Buy EURGBP 6-month double no touch. At 10.6%, 6m EURGBP implied volatility is at relatively elevated levels by the standards of the past five years. This makes sense given multiple political risks facing both currencies in that period, including the likely triggering of Article 50 by March and the French Presidential election in May. Still, one possibility is that the various risk cross-currents cancel each other out, leaving EURGBP noisy but ultimately range bound. A cheap way to play for this is via a EURGBP DNT, strikes at 0.8120 and 0.8870 for 15% of payout (spot ref. 0.8489). A breach of these levels – relative extremes of recent ranges – would suggest that one side or the other dominates conclusively in the 6 months ahead. Even paying as much as 15% of payout would produce a 6.7:1 trade-off. Also, if USD risk remains the dominant force and European politics takes a back seat, it’s possible that EURGBP implied volatility drifts naturally lower, allowing for profit taking opportunities. The risk to the trade is losing the premium paid.
  • Buy RUB, sell NAFTA FX. A protectionist turn in the incoming US administration’s trade policy would likely be negative for NAFTA currencies MXN and CAD. The risk of a shift in FDI inflows away from Mexico in particular underscores our bearish view on the peso (USDMXN forecast: 23 in 3m, 25 in 12m). Conversely, an improvement in the relationship between the US and Russia might prove supportive for RUB, against a backdrop of rising oil prices. We recommend positioning for this risk by going long RUB against CAD and MXN. Specifically, we recommend selling CADRUB 6m forward at 47.0850 (spot ref. 45.3940) with a 42.75 target a spot stop loss at 47.00. Our chosen target is just below where the cross traded in summer 2015, when the CBR stopped intervening. On the MXN side, we recommend selling a 6m MXNRUB forward at 2.8590 (spot ref. 2.8390), with a 2.60 target and a 3.00 spot stop loss.

Asia FX Strategy

2017 Core Views

  • Asian FX is likely to weaken further this year.
  • We expect the CNY to fall about 3% to 4% against its basket, and USDCNY to rise to 7.33 over the year ahead when combined with the rest of our G10 forecast set. We think the PBoC will manage the pace of the USDCNY’s rise, rather than allowing a large one-off devaluation.
  • A risk to our bearish CNY view is if Chinese policy is tightened meaningfully.

2017 Trade Ideas

  • Long USDCNH via forwards: We recommend taking advantage of the current pullback to go long USDCNH 6m forward at 7.044 (spot ref. 6.8274), targeting a move to 7.40, with a forward stop loss at 6.80.
  • Short TWD as a proxy for China risk: We like buying USDTWD 6m NDF at 31.790 (spot ref. 31.927) targeting a break higher to 33.5, with a stop at 31.25. While TWD has not historically been the most sensitive to CNY risk, we think it is trading close to policy resistant levels that would potentially make it much more vulnerable to further CNY depreciation from here.

US Interest Rate Strategy

2017 Core Views

  • We expect yields will rise, and there will be a move toward a semi-normal hiking cycle in the US. The ECB and BoJ will likely be on hold in 1H17, but taper questions may resurface in 2Q17.
  • While front-end yield spreads between the US and Europe/Japan will likely continue to widen, long-end spreads should begin to stabilize. This means a relative flattening of the US yield curve to the rest of the world.
  • We expect more uncertainty in policy and from increased geopolitical risk, which should translate to structurally higher rate volatility.

2017 Trade Ideas

  • Short Red (EDU8) Eurodollars: Current / Target / Stop (in yield %): 1.9/2.5/1.7. While there are nearly four hikes additional hikes priced between now and September 2018, we believe there’s room for more to be priced, as a consequence of a faster pace of hikes and/or a higher terminal rate being priced in. We like pairing this short with EDZ7 calls as unexpected soft spots in data may lead to hikes already priced in this year being pushed into next year.
  • UST 5s30s flattener vs JGB 5s30s steepener: Current / Target / Stop (5s30s US-Japan spread in basis points): 30bp / 0bp / 50bp. The likely sequencing of BoJ policy normalization – tapering and moving the 10y yield target higher first, followed by exit from NIRP later – should allow the JGB curve to steepen meaningfully relative to the US, where shorter maturity yields should rise relatively faster as the Fed continues to raise rates. The US 5s30s curve appears about 10bp too flat given current front-end, however, so we recommend entering this trade at fairer levels.
  • 2y forward 5s30s USD steepener: Current / Target / Stop (in basis points): 20bp / 40bp / 10bp. Although we expect the US curve to flatten in spot space, markets are likely to anticipate the next recession and price policy easing further out. With the forward curve close to its flat from the previous cycle and offering reasonably carry – about 1.25bp/ month – we favor forward starting steepeners.
  • Long 2y1y straddles vs 6m10y straddles: Current / Target / Stop (2y1y/6m10y implied vol ratio): 0.94 / 1.15 / 0.85. The market is pricing too little uncertainty around the path for short rates entering a period with significant questions regarding the Fed and potential impact of fiscal policy. Meanwhile, the maturation of the hiking cycle is consistent with steady to moderately lower gamma on longer tails.  Risks to the trade are potentially unlimited.

Credit Suisse trade ideas along with a variety of market analysis from top investment banks are available to our regular subscribers. Subscribe now or get a free 5-day trial.


Emerging Markets Fixed Income Strategy

2017 Core Views

  • We believe 2017 will be a year of sustained tension between those EM-negative and EM-positive factors that have been in play since Trump won the presidency.
  • We see parallels between the current risk pattern and the state of affairs in 2013, another year in which good G3 news, sharply rising UST yields, and bad EM news co-existed.
  • We think EM assets will keep up with comparable US assets this time around versus 2013 as EM valuations are less challenging, commodity prices are better supported, and EM funding shortages are less problematic now than in 2013.

2017 Trade Ideas

On the assumption that global risk markets will remain buoyant in anticipation of US tax cuts and US regulatory reform, we think yields on EM government debt will generally rise less sharply than yields on US Treasuries unless Trump’s administration moves ahead with forceful protectionist measures. On the basis of that view we like a basket of trades that includes two EM spread-trades and one “Trump hedge.”

  • A long position in the global EM sovereign dollar debt index, funded at the 5-year point of the US rates curve.
  • A long position in a pool of local-currency 5-year nominal bonds in Mexico (Mbono June ’22 at a yield of 7.38%), Russia and Indonesia, alongside 5-year inflation-linkers in Brazil (NTNB ’22 at a yield of 5.87%) and a paid position in US 5-year rates (at a yield of 1.947%). The bond positions in the three EM countries would be funded at the short end of the local rates curves.
  • An out-of-the-money Mexican peso put option that would serve as a hedge (for the trades above) against the possibility of aggressive Trump protectionism.  The risk of the trade is the premium paid.

European Credit Strategy

2017 Core Views

  • We modally expect € IG excess returns of 210bps, with total returns of -210bps. Risk-weighted expected returns are 96bps and -248bps, respectively.
  • We modally expect € HY excess returns of 776bps, with total returns of 465bps. Risk-weighted expected returns are 312bps and 59bps, respectively.
  • We expect gross € IG non-financial issuance to be €290bn in 2017, up circa 10% from €265bn expected for 2016FY.
  • We expect gross € IG unsecured financial issuance to be €195bn in 2017, up circa 20% from €165bn expected for 2016FY.

2017 Trade Ideas

  • We recommend fading politically-driven moves, and watch for entry points.
  • We recommend selling protection in iTraxx1 Fin Senior vs. Main.
  • We like bank AT1 bonds relative to bank LT2 and corporate hybrids.

Global Equity Strategy

2017 Core Views

  • On December 2nd, we increased our mid-year 2017 target on the S&P 500 to 2,350. However, we see a down market in H2 2017, hence our year-end target of 2,300.
  • Regionally, we are overweight Continental European and Japanese equities. Both benefit from rising yields and accelerating global growth.
  • We remain underweight US equities in a global context given concerns about valuation, margins and the impact of USD strength.

2017 Trade Ideas

  • We recommend an overweight of euro area equities.
  • We recommend an overweight of Japanese equities.

US Equity Strategy

2017 Core Views

  • Within US equities, we continue to favor small over large, though we think the small cap trade has become a show me story, driven by fundamentals, not valuation.
  • We also expect value leadership relative to growth to continue.
  • We remain constructive on Financials, while continuing to pare back on Technology (where we are neutral on all three industry groups).
  • We are watching key bond proxies – Utilities, Food & Staples Retail, Food Beverage & Tobacco – closely, but are not ready to step in yet and remain underweight.

2017 Trade Ideas

  • Within Financials, we are overweight Banks, Diversified Financials, and Insurance, but prefer Diversified Financials and Insurance over Banks.
  • For investors seeking opportunity in the bond proxies that have lagged recently, we would look to REITs and Telecom Services, where valuations are attractive.

Technical Analysis

2017 Core Views

  • We remain bullish the US$, and expect further significant strength in 2017.
  • We expect US bond yields to see a test of their secular trends.
  • We remain bullish European Equities.
  • We expect Commodity currencies to strengthen further.

2017 Trade Ideas

  • We recommend selling EURUSD, for .9625.
  • We recommend a 5s30s US bond curve flattener for 80bps.
  • We recommend buying the French CAC index.
  • We recommend selling EURCAD for 1.3520.

You can get Credit Suisse trade ideas and market views (and many other institutional research) via our subscription.

As close to the market as you can get...