Fra makro til mikro. Withdrawing liquidity, unleashing uncertainty? Erica Blomgren Chief Strategist Norway

Transcription

1 Fra makro til mikro Thomas Eitzen Head of Credit Strategy Erica Blomgren Chief Strategist Norway Withdrawing liquidity, unleashing uncertainty?

2 The allegory of the Cave can we learn anything from Plato? 2

3 The allegory of the Cave translated to Finance-speak The real world - Macro Markets Investors The wall Central Banks and market structures 3

4 What happens if you turn of the printing press and suspend the debt ceiling? Little effect on the real economy semi-blue sky Investors might change behaviour 4

5 The investment clock a great concept Reflation Rates up Equity up Goldilocks Rates down Rates up Recession risk Equity up Equity down Rates down Equity down Save Haven 5

6 The investment clock...how it should work 6

7 The investment clock...has never been on time Reflation Recession Risk Safe Haven Goldilocks 7

8 Credit Spreads = Expected Macro + Uncertainty - concept Decent expectations - world, but with Central Bank Put Probability Same decent world, but more uncertainty Better world with more uncertainty How well we think the world is doing + market structures

9 And markets get it right, right? Occasionally 3m USD Libor and market expectations of future rates 9

10 How do markets interpret and move? Markets <> Real world? The markets don t go in cycles With less CB the (perception of) the world needs to be better

11 Things we re wondering about Agenda From macro... to micro How is the world doing? And what is the market perception of it? Elephants in the room What do central banks do when rates are zero? Buy bonds but what happens when you stop buying? How to fund making America great again? What happens when you hit and/or revoke the Debt Ceiling? After the herd Nibor going places? So far only down, but Credit moves? Direct and indirect effects NOK NOK ed out? Conclusions Where will spreads be going? 11

12 How is the world doing? Markets are not necessarily connected to reality 12

13 A strong global expansion Broad-based rise in sentiment, global growth accelerates 13

14 with many positive surprises Both sentiment and hard data even better than expected 14

15 Above-trend growth in global GDP Forecasts SEB Nov 2017 (Sep 2017) GDP, % y/y US (2.2) 2.6 (2.4) 2.0 (2.0) Euro zone (2.1) 2.3 (2.2) 2.1 (2.0) Germany (2.0) 2.2 (2.0) 2.0 (1.8) UK (1.6) 1.3 (0.8) 1.1 (1.0) Japan (1.3) 1.2 (0.8) 1.0 (0.7) China (6.8) 6.6 (6.4) 6.2 (6.1) Sweden (3.2) 2.6 (2.8) 2.4 (2.4) Norway (main) (2.0) 2.4 (2.3) 2.3 (2.3) Nordics (2.5) 2.3 (2.3) 2.2 (2.2) OECD (2.1) 2.3 (2.1) 2.0 (1.9) EM (4.9) 5.1 (5.0) 5.1 (5.0) World (PPP) (3.8) 3.9 (3.8) 3.8 (3.7) GDP forecasts for most countries revised higher, implying global GDP growth of close to 4% in We remain above consensus. Consumption and investment decisions rather insensitive to political uncertainty. A mature expansion period: robust labour markets and high household confidence, while capacity utilisation is reaching levels that will drive new capital spending. Supply side restrictions will generally not stop the economic upturn during our forecast period. 15

16 US: Recoveries do not die of old age The economy will keep growing at a decent pace 16

17 US: Economy resilient to political noise Consumption and capital spending will rise regardless of Trump 17

18 Euro zone: Well above trend-growth The economy continues to surprise on the upside 18

19 UK: The Brexit cocktail Citizenship, Brexit bill, trade agreements, weak government, BOE, GBP Game plan ahead of Mar 29, The divorce 2. The future 3. The transition The real deadline: Oct

20 UK: Limited economic impact thus far Investment holding up, household consumption squeezed by weak GBP 20

21 From deflation, to lowflation A major shift for central banks 21

22 to inflation!? Is the Phillips curve still alive? Potential for an ugly surprise? 22

23 Is the Phillips curve still alive? Yes, but it s flatter and the follow-through to prices is uncertain Shrinking the unemployment gap by 1%-points equals 0.5ppt rise in wages Can pay levels be justified by rising productivity? Competitive pressure? What made inflation low will keep inflation low in the future? 23

24 What made inflation low the 4 bullet version Central bank independence Globalization Slack Weak bank capitalization (post GFC) 24

25 You know rates have been higher? Really?? 25 Rates the last 750 yrs

26 Elephants in the room When to stop the printing presses? How to fund making America great again? 26

27 Everybody talked about risk, nobody did anything now everybody are that cool Searching for Risk on Google vs. VIX index Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug "Risk" på Google Trends VIX 27

28 Stopping the printing machine 28

29 The risk spectrum has shifted A small step for central banks, a giant leap for markets 29

30 Fed: Markets too complacent on hikes Business as usual in 2018, or? Market pricing: 1 hike in hikes in 2018 SEB forecast: 1 hike in hikes in

31 Fed: Reducing its balance sheet From $4200bn to $ bn 31

32 According to markets, rates aren t supposed to MOVE - Implied volatility on US Treasuries MOVE Index ( ) Source:Bloomberg 32

33 But says Fed rates will move Will market overshoot on the upside? -0.3% -100bps! 33

34 ECB: When will the printing press stop? Tapering in 2018, only reinvestments from

35 Facts: Less central bank liquidity Providing less money, emptying the system of surplus money 35

36 Raising the US debt ceiling 36

37 The Trump show Tax cuts and Jobs act Trump s Tax cuts and Jobs act What? Conclusions? Details? Corporate taxes: Personal taxes: Potential to spur capita spending. The biggest gains will accrue to high earners Tax rate cut from 35% to 20%. Tax on global profits lowered to 10%. No ability to defer tax payments by keeping earnings abroad. A one-off 12% tax on retained earnings held abroad. Measures to reduced tax deductibility. The top rate of personal tax will stay at 39.6% but the threshold has been doubled. Reduced taxes for households with lower incomes. The standard deduction has been doubled. Net budgetary impact: Hard for conservative Republicans to accept Estimated at USD 1500bn or 0.7% of GDP over 10 years. Growth impact: The tax cuts would provide a modest boost to growth in 2018, which has already been assumed in our 2.4% GDP forecast. 37

38 Trump, a lame duck? Trump needs a political victory ahead of mid-term elections 38

39 Funding making America great again The debt ceiling: why, how and when? 39

40 Raising the debt ceiling is normal but political, and political means volatile 40

41 41 If foreigners don t have USD they need to get it through the FX swap market - Foreign banks USD cash affects EURUSD basis Foreign Related Institutions Cash Assets vs 3m EURUSD basis Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep Foreign Banks (lh) 3m EURUSD basis (rh)

42 And cash balances are being drawn up and down by politics - First Trump, then Debt Ceiling, then what? 42 EURUSD 3m basis Congress increases debt ceiling? Hey, it s the Treasury calling. We need to reduce our outstanding debt. Want cash? Trump is going to spend and borrow gazillons! Rates up!!!

43 Two elephants, one outcome: Stopping the printing machine Raising the US debt ceiling Market liquidity will be withdrawn 43

44 Less support to equities But not necessarily a strong negative 44

45 Volatility to rise Market s perception of risks should change in line with monetary policy 45

46 Spillover to Norway? Market liquidity will be withdrawn, less liquidity begets more volatility Stopping the printing machine Raising the US debt ceiling After the herd: 1. Nibor Gravity will pull, but NOK liquidity is abundant for now 2. Credits Direct QE bid effect Indirect basis effect Direct effect on issuance Market liquidity will be withdrawn 3. NOK NOK ed out or? 46

47 After the herd Nibor 47

48 48 Remember these two? - Foreign banks USD cash affects EURUSD basis & Debt Ceiling Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep Foreign Banks (lh) 3m EURUSD basis (rh)

49 matters for Nibor Raising the debt ceiling = withdrawing USD cash = higher Nibor 49

50 But for now, domestic factors dominate Too much NOK cash available Bank reserves in NOK mill: 50

51 But for now, domestic factors dominate Too much NOK cash available, reflected in 3m forward points in USDNOK 51

52 Most banks are very liquid - LCR portfolios are probably not bid bonds LCR distribution Norwegian and European banks Theoretical Covered Bond volume for LCR = 140% (bnok) 40% 35% Norske Europeiske 5 % av bankene 30% 25% 20% 15% 10% 5% 0% Q2-16 Q4-16 Q2-17 LCR Q But a lot of it is Central Bank cash (bnok) Q2-16 Q4-16 Q

53 What about Mr. Olsen? Norges Bank says it will hike rates in H

54 Norges Bank to cautious on growth Mainland GDP growth is accelerating to above trend 54

55 Norges Bank to cautious on growth The oil investment cycle has turned 55

56 Norges Bank to cautious on growth Business investment taking over the lead 56

57 Housing market no biggie We expect a modest correction of 4-6% in 2018, flat prices in

58 Housing market no biggie Only modest negative demand effects expected 58

59 Rising capacity utilization Ongoing improvement in labour markets 59

60 Rising capacity utilization Norges Bank is trusting the Phillips curve 60

61 Norges Bank hikes in Dec 2018 Unemployment falling faster than expected and the weak NOK will also give a boost NB can overlook current low inflation and hike slightly earlier and more than priced in 61

62 After the herd Credits 62

63 Why are we talking so much about tapering? - Because it matters for stuff we care about 63

64 Why it matters to credit 1 It s not how much central banks have on their books, but how much they buy Scatterplot - Central Bank purchases vs return on bonds , ,4-5 -0,2 0 0, ,4 150,6 64

65 Why are we talking so much about basis? - Because it matters for stuff we care about 65

66 Anatomy of NOK spreads Covered 2y OMFB1 2y OMFB1 Difference 5y OMFB1 5y OMFB1 Difference 66

67 Basis matter more than underlying risk? - A stretch, but more than a grain of truth to it Bank 2 5y model 5y B2 Difference 67

68 Basis Beta Credit beta to basis 2,5 2 1,5 1 0,5 0 OMFB1 2y OMFB1 3y OMFB1 5y B2 5y KO2 5y K1 5y

69 How do (NOK) spreads move? Basis is apparently important And sometimes we are rich/cheap

70 OK, so a lot of this basis-stuff coming from the outside - Well. And you are influencing it yourself as well 70

71 Curly hair is an indication of issuance effect -Exhibit 1: Is EURNOK basis affected by issuance? EURNOK forward curves (dark blue = spot = 1y basis) EURNOK basis Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan Source: SEB, BBG 71

72 How is EURNOK connected to the others?? -Exhibit 2: Is EURNOK basis affected by issuance? 60 5y EURNOK vs USD, GBP, AUD basis basket EURNOK wider than predicted by basket EURNOK basis EURNOK tighter than predicted by basket Basket basis Source: SEB, BBG 72

73 When EURNOK is off the line -Exhibit 3: Is EURNOK basis affected by issuance? Unexplained EURNOK basis vs issuance Issuance (mnok) EURNOK tighter than basket EURNOK wider than basket Source: SEB, BBG 73

74 So, when do people issue abroad? - Coincides a lot with maturities next 6-12 months Covered bond issuance and maturity in currency (mnok) Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 mnok Issuance last 6m Maturities btw 6-12m out Source: SEB, BBG 74

75 After the herd NOK ed out or? 75

76 Why this NOK weakness? Weak correlation between NOK and oil 76

77 Generally weak Scandie sentiment It s not only NOK that s suffering 77

78 Generally weak Scandie sentiment A bubble about to burst? 78

79 Generally weak Scandie sentiment Lower fixings and an ECB hangover 79

80 Even weaker NOK ahead? Negative seasonality & thinner liquidity 80

81 NOK to recouple with fundamentals A gradually stronger NOK in 2018 ECB/Riksbank hangover Housing collapse Higher short rates (fixings + expectations NB) NOK is cheap 81

82 What have we learnt today? We have a pretty blue sky But Debt Ceiling and Tapering will decrease liquidity and increase volatility Credits & basis will move mnok and we sometimes make it worse for ourselves ,6-0,4-0,2 0 0,2 0,4 0,6 0 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Issuance last 6m Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Maturities btw 6-12m out Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 82

83 And specifially for NOK credits? - All together now! If EUR covered moves 10bp and basis 10bp Spreads PnL OMFB1 5y B2 5y OMFB1 5y B2 5y 83

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