Strategy Sweden: On the radar

Transcription

1 Strategy 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 Sweden group, but not necessarily yet formalized in form of a specific view or trading idea Themes in this edition: - SEK rates: Overview of Stibor framework - SEK rates: Just like a (QE) prayer - SEK linkers: Livin on a prayer - USD: The Fed and the firing of the Death Star - SEK: The Fed s firing of the Death Star puts Scandis at risk - EUR/SEK: Bearish ahead of ECB QE1 & approaching mid November 2015

2 Chart of the week: foreign ownership of Swedish gov. bonds Foreign ownership has been reduced by roughly the same amount as Riksbanks QE. The chart shows a scenario where the remaining QE would be similarly met by foreign selling. 2

3 Trades on the radar Strategy view on direction and curve: Riksbank may have to counter boosted ECB QE through a rate cut near-term. Still, better risk-reward in 5/10s flattener over out-right longs. We prefer 2/5s steepeners over 5/10s. Covered bonds look overly cheap both versus govies and swaps. Previous edition (12 November) Strategy view on direction and curve: Riksbank may have to counter boosted ECB QE through a rate cut near-term. Still, better risk-reward in 5/10s flattener over out-right longs. We prefer 2/5s steepeners over 5/10s. Covered bonds look overly cheap both versus govies and swaps. FI Trade Ideas Curvature (12-Nov) Spio 186/SGB 1047/SGB Sell 1047s (5y) versus Spio 186 (2y covered bond) and 1059s (new 10y). Potential for 2/5s to steepen relative 5/10s and wide covered spreads. About flat carry. Govies (3-Nov) SGB 1053/1058 flattener. Squeeze in <10y tenors have left SGB 1053 looking overly cheap. Relative curve (3-Nov) NOKSEK 2/10y flattener. A steeper NOK versus a flatter SEK 2/10y curve seems a reasonable bet given that Norges Bank may be forced to an additional rate cut and the relative curve is already out of sync (too steep) relative the 2y spread. Swap spread (16-Oct) sell SGB 1058, receive in swap. SEK lags global ASW tightening trend but a number of factors speak for some catching up: less foreign ownership, more bond supply and potential that Riksbank venture into other type of bond in QE program. Covereds (16-Oct) long 5y covered vs govies. Covered bond looks overly cheap and should have potential to perform near-term as risk-aversion in credit markets has abated. Index-linked (28-Aug) long 5y5y BEI (SGBi 3102/3109) Swedish 5y BEI lags global downturn. Low oil prices yet to feed through into CPI and may trigger more easing from Riksbank. Yet we think it make s sense to be cautiously long 10y BEI since it is below fairvalue. FI Trade Ideas Curvature (12-Nov) Spio 186/SGB 1047/SGB Sell 1047s (5y) versus Spio 186 (2y covered bond) and 1059s (new 10y). Potential for 2/5s to steepen relative 5/10s and wide covered spreads. About flat carry. Govies (3-Nov) SGB 1053/1058 flattener. Squeeze in <10y tenors have left SGB 1053 looking overly cheap. Relative curve (3-Nov) NOKSEK 2/10y flattener. A steeper NOK versus a flatter SEK 2/10y curve seems a reasonable bet given that Norges Bank may be forced to an additional rate cut and the relative curve is already out of sync (too steep) relative the 2y spread. Swap spread (16-Oct) sell SGB 1058, receive in swap. SEK lags global ASW tightening trend but a number of factors speak for some catching up: less foreign ownership, more bond supply and potential that Riksbank venture into other type of bond in QE program. Covereds (16-Oct) long 5y covered vs govies. Covered bond looks overly cheap and should have potential to perform near-term as risk-aversion in credit markets has abated. Index-linked (28-Aug) long 5y5y BEI (SGBi 3102/3109) Swedish 5y BEI lags global downturn. Low oil prices yet to feed through into CPI and may trigger more easing from Riksbank. Yet we think it make s sense to be cautiously long 10y BEI since it is below fairvalue. FX Trade Ideas (contact us for more info) EURNOK (27-Aug) - enough is enough for the NOK NOKSEK (9-Sep) - be like Fleksnes EURGBP (1-Oct) - suckers for the pound despite Corbyn NZDUSD (12-Oct) - stop milking the Kiwi USDJPY (17-Nov) - Hai(ke)! FX Trade Ideas (contact us for more info) EURNOK (27-Aug) - enough is enough for the NOK NOKSEK (9-Sep) - be like Fleksnes EURGBP (1-Oct) - suckers for the pound despite Corbyn NZDUSD (12-Oct) - stop milking the Kiwi 3

4 SEK rates: Overview of Stibor framework Stockholm Interbank Offered Rate is a reference rate that shows an average of the interest rates at which a number of banks active on the Swedish money market ( the Stibor banks ) are willing to lend to one another without collateral at different maturities. At least 4 Stibor banks are required to calculate and publish Stibor. If the number of Stibor banks is <=6, all of the reported interest rates shall be included in the calculation. If the number of Stibor banks is 7 or 8, the highest and lowest interest rate for each maturity is removed before the calculation. If the number of Stibor banks is >=9, the two highest and the two lowest interest rates are removed before the calculation. Maturity Trading post Bid/Offer T/N 500m 8 bps 1w 250m 10 bps 1m 100m 15 bps 2m 100m 15 bps 3m 100m 15 bps 6m 100m 15 bps Each Stibor bank is entitled to borrow & deposit one trading post per counterparty and maturity per day at each counterparty. Each bank shall distribute at least SEK 2 billion in counterparty limits per Stibor bank for Stibor transactions. Rules for governance and control The Swedish Bankers' Association (SBA) assumes overall responsibility and is the principal for Stibor (since 4 March 2013) Stibor is set by Danske Bank, Handelsbanken, Länsförsäkringar Bank, Nordea, SEB and Swedbank. The Stibor Committee consists of representatives from all Stibor banks as well as at least one independent member (nominated by SBA). Its task is to design and decide on the Stibor framework (such as rules for reporting and calculating Stibor rules for the Stibor banks' internal governance) For more details and information on the Stibor framework please go to: Reporting schedule 10:30AM 10:50AM Reporting of interest rates, which during this period are not visible for anyone other than the person reporting the interest rate. 10:50AM 10:55AM All interest rates are visible for the people reporting the interest rates within the Stibor banks. During this period, transactions may take place in accordance with that set out below and reported interest rates may be adjusted if reported incorrectly. 10:55AM 11:00AM Stibor is calculated for maturities in accordance with that set out below. 11:00AM Stibor and each bank s reported interest rates for each maturity are published. As a basis for its reporting for each maturity, each bank shall use: Primarily (1) Deposit or lending transactions in SEK in the interbank market Secondly (2a) Quoted inter-bank levels in SEK, or (2b) A basket of Commercial Papers (CP) and/or Certificate of Deposits (CD) consisting of: At least 50 % SEK, EUR swapped to SEK and USD swapped to SEK A spread is then added to the interbank rate or the above basket to reach an interest rate at which the bank is willing to lend. The spread is set individually for each bank. The bank shall report current indicative interest rates for Swedish Commercial Papers in SEK for maturities of up to 6 months. Reporting shall be done no later than 11:00 AM. 4

5 SEK rates: Just like a (QE) prayer Riksbank Governor Ingves to reporter 6 May 2015: It s not very advantageous to place money in Sweden at the moment That s exactly what we want to achieve.. The prayer that negative rates, massive QE and verbal FX intervention would smoke foreign bond holders out of Sweden has seemingly been heard. Just as in US, outflows have been significant and despite the free-float bond stock currently is smaller than in Norway, higher yields due to lower liquidity is of equal concern as that of lower yields due to bond scarcity

6 SEK linkers: Livin on a prayer Turn-out data still exhibit a negative momentum in CPI, both globally and in Sweden. Plugging in our CPI forecast, an upward momentum should be building. This should be linker positive, but the proof of the pudding is in the eating higher actual CPI numbers are still needed to underpin a sustained increase in BEIs Global CPI momentum indicator Based on seasonally adjusted headline CPI fro 17 advanced economies m/m changes are normalized to have st.dev. 1 and mean 0 and then a weighted average is calculated. Weights are determined to roughly reflect size of economy. Linker mkt CPI momentum indicator Same approach as above but only US, UK, EZ and Sweden is used with 25% weight each. Country Weight Country Weight Country Weight Country Weight US 35% Canada 3% Israel 1% Switzerland 1% Eurozone 30% S. Korea 3% N. Zealand 1% Taiwan 1% Japan 10% Czech Rep. 1% Norway 1% UK 6% Denmark 1% Singapore 1% Australia 3% Hong Kong 1% Sweden 1% 6

7 USD: The Fed and the firing of the Death Star Beyond the signalling effects of a big step towards exiting unconventional policies (the Fed will switch from a quantitative regime to a price-regime), Fed will need to engage in new types of market transactions to control the floor of rates at liftoff. This is due to a combination of technical frictions & excess liquidity. For instance, money market funds & agencies cannot obtain the current rate on reserves (25bp). If not for these frictions, the Fed Funds rate would be >25bp already. The Death Star (ON RRP) rate will be lifted from 5bp to 25bp, as will its 300bn cap (to what?). The Fed will also offer term RRPs, the full conditions of which are yet to be decided. This will likely translate to reduction of bank reserves in a way that has never happened before. Fed signalling a path in line with half the pace of The market is pricing half of half. Bank reserves likely to shrink at liftoff Tighter US financial conditions often bad for carry & EM FX Revealed preferences suggests Fed seeks to tighten conditions, and not to hike softly 7

8 SEK: The Fed s firing of the Death Star puts Scandis at risk The Fed aims at hiking rates for the first time in almost 10 years. It aims to do so with 2.5trn excess liquidity and a 4.5trn balance sheet. It will absorb liquidity via ON and Term RRPs (the Death Star) to control money market rates. This is probably impossible to discount, see e.g. FX: discounting the undiscountable. Liquidity in SEK will worsen in coming weeks for seasonal reasons, and will be sub-par until February. Higher US real yields often coincides with higher volatility, and/or a weaker NOK. This could easily spill over to a higher EUR/SEK, no matter what we think about the ECB 8

9 EUR/SEK: Bearish ahead of ECB QE1 & approaching mid-16 In the discounting of the formal ECB QE1 announcement of, EUR/SEK dropped 2%. If history repeats or rhymes, this would be consistent with EUR/SEK at in December = no game-changer for the Riksbank. The Riksbank cares mostly about the trade-weighed krona which is currently 0.5% weaker than forecast. If the ECB brings out a big bazooka and EUR/SEK comes under pressure as it did in Feb/Mar-15, the Riksbank is likely to respond with a rate cut or even intervention. The FX impact from balance sheet policies is uncertain, but suggests substantial downward pressure on EUR/SEK next year. 9

10 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. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Martin Enlund martin.enlund@nordea.com Mats Hydén mats.hyden@nordea.com Jerk Matero jerk.matero@nordea.com Mikael Sarwe mikael.sarwe@nordea.com Henrik Unell henrik.unell@nordea.com Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets. 10