Strategy Research Sweden: On the radar - e-Markets Nexus

Strategy Research Sweden: On the radar
This publication is a summary of interesting market related topics and observations that have been covered and discussed within the Strategy Research group, but not necessarily yet formalized in form of a specific view or trading idea… Themes in this edition:
‐ ECB: Draghi back in the hot seat sooner than expected
‐ FX: EUR/SEK implications of ECB quantitative easing
‐ Cross‐market: If Germany turns Japanese, notable flattening potential on the SEK curve
‐ SEK linkers: Index‐extension adds to flattening bias
‐ USD rates: High five(s) on the USD fly
‐ SEK rates: Swedish bond future rolls
‐ Riksbank: Pity the Riksbank ‐ unintended but logical consequences
1 September 2014
Draghi back in the hot seat sooner than expected
Expectations have shifted swiftly towards more and
earlier action by Draghi, following his comments about
declining inflation expectations in Jackson Hole.
EUR inflation fixings are trading around 0.3‐0.5% all
the way out to spring next year. If that would be
realized, QE should be a done deal. However, the
”package solution” that was delivered by the ECB in
June should have bought the central bank a little more
time, and Draghi can probably get away by talking and
save potential acting for later…
1.2
EUR HICPxT fixings
ECB forecast (interpolated)
1.0
160
140
120
0.8
100
0.6
0.4
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Source:Nordea, Bloomberg & ECB
2
Italy
Germany
France
60
Nether
20
0.0
Spain
80
40
0.2
Outstanding SME loans
0
1999
Greece
Portugal
2001
2003
2005
2007
2009
2011
2013
Source:Nordea & sifma
EUR/SEK implications of ECB quantitative easing
As pondered by our FX strategist Martin Enlund:
The broad trade‐weighted USD index dropped by 7.3% in the
run‐up to the Fed QE2 announcement, and by 3% ahead of
QE3. Assuming a symmetrical reaction in all EUR crosses
ahead of a potential ECB QE announcement, EUR/SEK would
drop to 8.48 (QE2), or to 8.87 (QE3). USD/SEK would remain
unchanged. This would translate into the KIX index dropping
to 104.3 (QE2) or 106.5 (QE3). The Riksbank forecasts KIX at
105.3 in Q1 2015 but 100.9 in 2017.
This FX reaction would be uncomfortable for the Riksbank ‐
if the reaction were to mirror the run‐up to QE2, but since
the bank already forecasts a notable appreciation, not
enough to force its hand in an unconventional direction…
3
If Germany turns Japanese, notable flattening potential on the SEK curve
1. German 2yr has been japanized for long
3. With German 2yr already below 0%, any further rally
in the 10yr will flatten the curve in a 1‐for‐1 fashion…
2. While the long‐end seems to be getting there…
5
10yr rates
4
4. In this environment, flatten SEK 2s/10s or
5s/10s may actually be a nice selection…
5
Germany
Japan
4
3
3
2
2
1
1
0
51
62
12
20
-27
-22
-66
-65
0
Spread
250
250
150
150
50
50
-50
-50
07
08
09
10
11
12
13
14
Source: Nordea Markets and Macrobond
4
-105
Jun 2001
Nov 2005
Apr 2010
2s/10s (sek vs eur)
5yr5yr fwd (sek vs eur), rhs
-107
Aug 2014
Source: Nordea
SEK linker index‐extension adds to flattening bias
In December, SGBi 3105 becomes shorter than 1y and will
be excluded from index. This leads to an extension of the
index‐duration and thus to flattening interest among
index‐trackers…
The real rate curve is historically steep and there is a
strong global flattening trend in nominals right now…
11
10.5
duration
10
9.5
9
8.5
8
In addition, SGBi 3107 is a potential buy‐back loan in 2015,
as the debt office seeks to issue a new 4yr bond
7.5
Thus, all together, we believe there is potential for the real
rate curve to flatten and at the same time as being short
forward real rates (SGBi 3107 vs 3102 or 3108) looks like an
interesting trade for higher rates!
6.5
7
6
2006
OMRX index-linked
2008
2011
2014
Source:Nordea Markets, Macro bond
75
90
65
2.2
70
55
45
1.7
50
35
1.2
25
30
15
0.7
10
5
0.2
-0.3
Jul05
-5
-10
-15
Apr08
Jan11
SGBi 3107/3102 tail yield
Oct13
SGBi 3102 const-mat yield
5
-25
Jul05
-30
Apr08
SEIL 5-10s (lhs)
Jan11
Oct13
SEGV 5-10s (rhs)
High five(s) on the USD fly
155
139
124
122
94
104
63
87
32
Jan 2011
Mar 2012
Jun 2013
2s/5s (usd)
5s/10s (usd), rhs
69
Aug 2014
Source: Nordea
The hawkish view: when tapering is over, the focus will
logically shift to the timing of a first rate hike. For those
expecting rate hikes to come sooner rather than later,
paying 2yr and 10yr against receiving 5yr is an
attractive trade.
The dovish view: if the economy would take a turn for
the worse, with delayed tightening as an effect, the 5yr
point is the cheapest part of the curve and the
2s/5s/10s curvature will prove too steep. Particularly
given the recent twist‐like development of 2s/5s in
relation to 5s/10s.
155
36
5.4
36
124
11
4.6
11
94
-13
3.8
-13
63
-38
3.1
-38
32
Jan 2011
Mar 2012
2s/5s (usd)
Jun 2013
2s/5s/10s (usd), rhs
6
-63
Aug 2014
Source: Nordea
2.3
Jan 2011
-63
Mar 2012
Jun 2013
5yr5yr fwd (usd)
2s/5s/10s (usd), rhs
Aug 2014
Source: Nordea
Swedish bond future rolls
The Swedish bond future rolls are starting ahead of
September IMM. For government bonds in particular, the
back contract has had a tendency to cheapen vs the front
contract 5 to 10 days ahead of the roll. The opposite is
seen during the last 5 days.
This also holds for e.g. the SHYP 2y roll, but otherwise the
pattern is less clear for mortgage bonds. With about two
weeks left of the roll, roughly 50% is completed (both for
govies and mortgages). The roll in the 10y govies start
earlier than in the 2y and 5y, but the amount is also
larger.
40000
35000
0.80
0.60
Roll cheap
0.40
0.20
0.00
‐0.20
-20
-15
-10
-5
Data: Last 8 rolls
50000
Back contract open interest
ahead of futures roll
Roll rich
10y (back vs front contract)
‐0.40
45000
0
5
Source:Nordea Nasdaq
10y gov future
40000
30000
35000
25000
20000
25000
2y govie
15000
Open interest - back
contract
Open interest - front
contract
30000
5y govie
20000
10y govie
15000
10000
Half
roll
completed
10000
5000
5000
0
0
-40
-30
-20
-10
Data: Last 8 rolls
0
10
Source:Nordea & OMX
7
-40
Data: Last 8 rolls
-30
-20
-10
0
10
Source:Nordea & OMX
Pity the Riksbank: unintended but logical consequences
NIER:s business and consumer surveys for August
included foremost one big shocker – household inflation
expectations dropped massively from 0.7 to an all‐time
low 0.2%. A development that normally shouldn’t occur
at a point when the inflation trend has turned up, which
we are pretty sure it has (thanks SEK‐weakening for
that).
It is the unintended, but logical, consequence of a
central bank that went too far too late. With its 50 bps
rate cut and extremely soft rhetoric, the Riksbank
basically shouted out to the population – “Hey, we are
panicking! Watch out ‐ we have a major deflationary
issue!”
If you send that very potent signal as a central bank you
shouldn’t be surprised that people listen to you. And
boy, did households listen and change their
expectations. Unfortunately, this could create an ever
bigger problem for the Riksbank to reach the inflation
target, since short‐term inflation expectations are very
tightly linked to wage expectations and thereby wage
demands. So, the 50 bps rate cut has, so far, meant more
gasoline on the house price fire and potentially lower
wage demands. Ehhh, was this what we needed?
4.0
3.5
4.0
Sweden CPIF, lhs
Household 1-yr inflation expectations, rhs
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.0
1.5
0.5
1.0
0.0
0.5
-0.5
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0.0
Source: Nordea Markets and Macrobond
4.00
3.75
4.0
Sweden wage expectations, lhs
Household 1-yr inflation expectations, rhs
3.5
3.50
3.0
3.25
2.5
3.00
2.0
2.75
1.5
2.50
1.0
2.25
0.5
2.00
1998
2000
2002
2004
2006
2008
2010
2012
2014
0.0
Source: Nordea Markets and Macrobond
8
Thank You!
Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S.
Kristoffer Eriksson [email protected]
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Fredrik Floric,
[email protected]
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9
Mats Hydén, [email protected]
Mikael Sarwe [email protected]
Henrik Unell
[email protected]
Alexander Wojt
[email protected]