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: - Riksbank: instead of printing cash, burning it? (1 of 2) - Riksbank: will Sweden re-cashify? (2 of 2) - EURSEK CCBS: yield pickup available for EUR assets - SEK rates: front-end municipals cheap - SEK equity: impact of increased corporate risk-weights - FX: markets in relief mode, but in large(?) part due to the Fed - FX: steady CNY CFETS index could prompt USD/AXJ worries 9 March 2016

2 Chart of the week: no cash withdrawals despite NIRP The stock of Swedish notes and coins in circulation in decreasing in an accelerating pace, despite a negative policy rate of -0.5%. Cash is obviously NOT king, at least not in Sweden 2

3 Trades on the radar Strategy view on direction and curve: We believe markets price a bit too high probability of a US recession and too low probability of another Fed hike, thus we still have slightly bond bearish outright bias. Swedish positive macro surprises look stretched on the upside, and lower borrowing need and increased QE may put a lid on the yield spread between Sweden and other markets. Trade idea Date Comment New Kommuninvest: buy KI 1708 vs swaps 9-Mar Cheap bond with attractive roll-down characteristics and a buy-back candidate already in June. For more details, see this publication. Active Linkers: higher fwd BEI proxy. Long SGBi 3112 BEI, short SGBi 38 BEI 12-Feb SEK rates: SEK rates: higher Swedish forward BEI Active Frond-end: receive SEK FRA Dec16, pay RIBA Mar17 12-Feb SEK rates: have a look at receiving FRA Dec16, pay Mar17 RIBA Active Volatility: buy 1yy atmf SEK receiver, delta hedge delta in SGB Feb SEK rates: a way to be long optionality Active Govies: SGB 58/53 flattener 3-Nov SEK rates: steep y+ govie curve Active Covereds: long 5y covered vs govie 16-Oct SEK rates: no cover for covereds, but widening is overdone The list of trade ideas is up-to-date around the date of publication. The column Date shows the publication date in which the trade idea was initially listed. It does not necessarily reflect our view on the optimal entry date. When a trade is removed from the list, it will be marked accordingly. Obviously, the date of removal/publication does not necessarily reflect our view on the optimal exit date. 3

4 Riksbank: instead of printing cash, burning it? (1 of 2) After the introduction of a negative repo rate in February 2015, savings at deposit accounts has increased and the amount of notes and coins in circulation has decreased. This is quite contrary to intuition, and to the development in other economies. Indeed, on the Riksbank s premises, cash seems to be burned rather than printed More on Swedish cash situation: flip to next page! 4

5 Riksbank: will Sweden re-cashify? (2 of 2) The lower bound for negative rates is determined by at what level the private sector flees into cash. In this respect the value of the outstanding stock of coins and notes is interesting. The stock of cash has been decreasing rapidly in Sweden, suggesting a very advanced country potentially tolerating deeply negative rates. However, this decline in cash usage may have been exacerbated by structural reforms which have diminished activity in the informal sector. Decreasing subsidies & a labour supply shock could prompt rising cash usage. ROT and RUT = tax deduction for domestic services Now: rising support for working & hiring in the informal sector 5

6 EURSEK CCBS: yield pickup available for EUR assets The EURSEK cross-currency basis swap (CCBS) curve is historically very steep. Rather than reflecting expectations on higher future frontend basis spreads, the slope is a consequence of Swedish bond issuance in EUR combined with excess liquidity in SEK (Riksbank s QE). If a CCBS is used to FX hedge EUR assets back to SEK instead of rolling short-term FX fwds, a significant yield pickup is created (2) very steep indeed! (1) The CCBS curve is steep (3) The yield pick-up created through swapping a EUR bond (a swap is in this chart used for a proxy) to SEK is significant given the low (or even negative) level of yields. 6 (4) Bond issuance is likely to continue as long as credit growth in Sweden is strong. Tighter regulation should dampen growth and flatten CCBS curve eventually.

7 SEK rates: front-end municipals cheap Cheap vs swaps, RIBAs or as anchor in front-end steepening trade Historically, Kommuninvest has started buy-backs 14 months before maturity. KI 1708 could be bought back with start already in June Outstanding amount, bn SEK 14m to maturity KI (1) Buy 1708 vs swaps KI KI KI 16 KI Time-to-maturity Source:Nordea Markets KI KI maturity-matched swap spreads Time-to-maturity Source:Nordea Markets (2) hedge it with FRA/RIBA tightener Box Kominv 2y, swap 2y, 1st FRA, 2nd RIBA KI 1708 RIBA Jun17 FRA Sep17 (3) or just buy it vs Jun17 RIBA. If u look for steepening trade, hedge with FRA Sep Nov 13 Jun 14 Dec 14 Jul 15 Feb 16 Source: Nordea Markets -0.5 Jun15 Aug15 Sep15 Nov15 Jan16 Feb16 Source: Nordea Markets 7

8 SEK equity: impact of increased corporate risk-weights Last week the Swedish FSA (SFSA) published two consultation memorandums on revisions to calculation of corporate risk-weights. The outcome the proposal is uncertain and we cannot make any specific conclusions at this point others than the capital requirements will increase significantly and the risk for decreased pay-out ratios among Swedish banks remains high. The memorandums: Higher risk-weights (RWs) on corporate exposures The SFSA proposes changes to the calculations of the of probability of default (PD) and in turn RWs for corporate exposures. The calculations of PD should assume that at least every fifth year is a downturn year and the assumed default frequencies during a downturn year may also need to be raised. The corporate RWs are expected to increase by at least a few %-points for all banks (the average RW is expected to exceed 30%). M-factor floor at 2.5 years The SFSA proposes a floor rule of 2.5 years for the M- factor, i.e. the remaining average duration of the corporate loans (currently ranging 1-5 years). The impact on the CET1 minimum requirement is in the range +0.2 to +0.6pp. The impact can be calculated fairly accurately and should be manageable from the banks perspective. Potential impact on CET1 ratio from SFSA proposal In order to assess the outcome of the proposal we have constructed two scenarios with the following assumptions: Scenario 1: Minimum impact. We assume that SHB s corporate RWs are increased to 30% and the other banks get a 2pp impact on the corporate RWs. For Swedbank we have included the tenant owned associations to make the numbers comparable. Scenario 2: More likely outcome. We have assumed that SHB corporate RWs increase by ~pp to 31% and Nordea s by 3pp. For SEB and SHB we have conducted a simplified regression analysis assuming a linear impact between the Nordea s and SHB s current RWs and their increase of RWs. This would result in a ~6pp increase for SEB and ~7pp increase for Swedbank. In the charts to the right, we show the potential, combined impact from the two proposals and also compared capital requirements to the regulatory minimum requirement after the announced increase in counter cyclical buffers (2.0pp in Sweden and 1.5pp in Norway). SHB is impacted the most in our calculations while Swedbank still have a decent buffer to the minimum requirements in both scenarios. Please not that we have not included any management buffers on top of the minimum requirements in any of the calculations. Contributed by Nordea Financial Equity Research Team 8

9 FX: markets in relief mode, but in large(?) part due to the Fed Global markets have been in relief mode for a while for several reasons, including a soft repricing of the Fed (visible in US 5y real rates). When real rates fall, carry currencies normally perform, as does EM FX, as does the NOK Sounds familiar? If we are right and the market is currently underpricing the outlook for Fed hikes, then riskier currencies will face headwinds later in spring. 9

10 FX: steady CNY CFETS index could prompt USD/AXJ worries (AXJ = Asia ex Japan) China unveiled its new CFETS index in December. The CNY has weakened ~2% since then (an annual pace of ~8%), but this has been driven largely by movements in USD/JPY. PBoC Vice Governor Yi Gang has recently said PBoC aims to keep the yuan's value relatively stable against a basket of currencies. Assuming China is intent on rebalancing its economy (towards more consumption and less focus on exports & investments), devaluation should not be in its interest. If the TWI CNY gains due to EUR/USD or USD/JPY, then the implicit rise in USD/CNY risks spilling over to USD/AXJ. Implied USD/CNY from a % move CFETS weight Implied USD/CNY-adjustment (%) USD/CNY 26.4 n.a. EUR/USD JPY/USD HKD/USD GBP/USD AUD/USD NZD/USD SGD/USD CHF/USD CAD/USD MYR/USD RUB/USD THB/USD Sources: CFETS, Nordea Markets

11 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. 11