European Derivatives：Navigating an Olympic rally

Investment Rating - The report maintains a bullish duration bias over the medium term, indicating a favorable outlook for long-duration investments [5][16][31]. Core Insights - The global easing cycle is underway, with most central banks expected to cut rates, particularly the ECB, which is projected to implement further cuts in September [9][10][14]. - The €STR curve is pricing in cumulative cuts of 28bp and 70bp by September and December meetings, respectively, and around 160bp by year-end 2025, reflecting a dovish outlook [10][11][14]. - The report highlights a significant decline in yields, particularly in the Euro area, with 1Yx1Y €STR yields dropping approximately 65bp in July [5][9]. - Tactical profits have been taken in various trades, including the Dec24/Dec25 Euribor curve flattener and 1Yx5Y A/A-50 receiver spread, indicating active management of positions in response to market conditions [5][17][19]. Summary by Sections Global Rates Strategy - Yields have declined sharply due to a dovish shift in central bank policies, driven by a deteriorating macro backdrop and weakening labor markets [5][9]. - The report notes a bull-steepening dynamic in the €STR forward yields, with a significant drop in yields observed [6][9]. - The Fed is expected to initiate an easing cycle in September, with a cumulative cut forecast of 125bp this year [9][14]. Tactical Recommendations - The report recommends holding a long-end steepening view and entering into various swap curve steepeners, reflecting a strategy to capitalize on expected yield movements [5][36][37]. - Tactical profits have been taken in several positions, including the Dec25/Dec26 conditional bull steepener, indicating a proactive approach to managing risk and returns [21][23]. - The report suggests hedging against potential hard landing scenarios through conditional bull-belly cheapeners [31][35]. Market Dynamics - The report discusses the changing dynamics of swap flies, noting a decline in their positive directionality to yields, which is typical during easing cycles [23][25]. - Swap spreads have widened across the curve, with a modest outperformance in the belly, reflecting market reactions to macroeconomic conditions [38][40]. - The report emphasizes the importance of monitoring macroeconomic indicators, as they will influence the volatility and direction of swap spreads [41][42].