Fixed Income and FX Weekly

Transcription

1 Fixed Income and FX Weekly Softer growth and renewed sovereign debt focus 23 May, 2011 Bjørn Roger Wilhelmsen Chief Strategist, FX & Fixed Income

2 Good morning, A stream of bad news from the euro zone over the weekend hit the EUR and Asian stock markets overnight. Rating agency Fitch downgraded Greece and S&P cut its outlook on Italy s A+ rating to negative from stable. In addition, renewed concerns over the health of Spanish local finances and a message that Norway said it was suspending a grant payment to Greece also added to a softer sentiment. As a result, market interest rates opens the European trading session lower this week, having been roughly unchanged last week. Developments in the euro area may also have implication for the NST 474 bond auction today (NOK 3 bn), as demand for Norwegian government bonds may increase and asset swap spreads may widen in the current environment. We recommend participating in the auction. The slope of the yield curve continued to flatten last week, benefitting our NOK 2-10 relative flattening recommendation. Moreover, we also highlight the relative strong performance of the 4-6 yr segment of the Norwegian curve. As we continue to believe that the market is underestimating the number of interest rate hikes by Norges Bank going forward, payer-positions in the 5yr interest rate swap (or a 5-10 flattener position instead of 2-10) looks increasingly attractive. Speaking of Norges Bank, in his speech before the parliament last week Governor Olsen reiterated that unemployment is slightly lower than expected, while the statement about wage growth prospects was somewhat more hawkish than in previous speeches ( It appears that wage growth in 2011 will be somewhat higher than envisaged in the March Monetary Policy Report ). The key event of the week is Mainland-Norway GDP growth in Q1; we expect 0.7% q/q, marginally below consensus and Norges Bank at 0.8%. Housing and oil and gas investments were most likely key drivers of growth in Q1, while growth in private consumption and exports were sluggish. 2

3 Only minor changes in interest rates last week Interest rate swaps, changes last week (bp) 4 Norway Sweden Euro area US y 5y 10y

4 Curves: The slope of the yield curve flattens, as expected especially in Norway and relative to SEK 2-10, in line with our view The slope of the yield curve, 2-10 (swaps) NOKSEK 2-10 box (interest rate swaps) Developments in fixed income markets are benefitting our 2-10 NOK-SEK box recommendation, now trading at around +30 (trade was opened at +40 for a target of -10), see chart to the right 4

5 4-6 yr segment of the curve has become particularly expensive Trade on watch list: Position for 5-10 flattener (instead of 2-10) fly vs. 1y interest rate swap NOK interest rate swap, yield curve 5

6 Money market: Red FRAs further down last week We continue to expect a steeper FRA-rate curve Norway FRA-rate curve FRA-rates, changes from a week ago (%-points) Last week Now Jun-11 Dec-11 Jun-12 Dec-12 Source: EcoWin, First Securities Jun-11 Dec-11 Jun-12 Dec-12 NOK EUR SEK Source: EcoWin, First Securities Our recommendation to pay 3m NOK FRA in dec-12 continues to suffer and the current level (3.85%) is below opening levels of trade (4.0%). Our target is 4.5%, with s/l at 3.75% 6

7 Expected future market rates well below Norges Bank s path 3m NIBOR forecast Key policy rate projections 5,00 FRA-curve Norges Bank FRA forecast 5.0 Norges Bank 5.0 4, Swedbank First , Market expectations* 3.5 3, , , ,00 3m NIBOR Source: Reuters, Norges Bank, First Securities "Jun-11" "Sep-11" "Dec-11" "Mar-12" "Jun-12" "Sep-12" "Dec-12" "Mar *Based on our estimates of credit spreads Source: EcoWin, First Securities In his speech before the Parliament last week, Governor Olsen reiterated upside risks to wage growth amid lower than expected unemployment 7

8 Interest rate differentials vs. euro area increasing slightly Trade on watch list: Pay NOK FRA-rate in Dec-11 or Mar-12 vs Euriobor Expected change in 3m market rate 1,40 NOK SEK EUR 3m FRA-rate in Mar-2012 (red-march) 1,20 1,00 0,80 0,60 0,40 0,20 Source: Reuters, First Securities 0,00 jun-11 sep-11 dec-11 mar-12 jun-12 sep-12 dec-12-0,20 8

9 FOMC minutes: Members discussed the exit strategy but discussions did not mean that the move towards such normalization would necessarily begin soon Steps in normalization policy : 1. Ceasing to reinvest principal payments on agency securities and Treasury securities Fed Funds target vs. Taylor rule The first increase in the key policy rates should precede asset sales Fed Funds Assets sales: Most thought that the pace of asset sales should be pre-scheduled Taylor rule = 5 - Unempl * Inflation Forecast is based on FOMC s forecast for unemployment and inflation Source: EcoWin, First Securities 9

10 EMU core inflation increases probability of ECB hike in July Q1 GDP growth and core inflation higher than expected ECB (Euribor) forward looking Taylor rule 10

11 More evidence of weaker global growth momentum US Philadelphia Fed, details World retail sales, growth y/y % 11

12 There are plenty of arguments to go long NOK But don t forget to look at valuation Fundamentals supporting the NOK 1. Economic growth is gaining momentum and the outlook looks good; EURNOK and market maker forecasts Interest rates are likely to be increased to contain the housing market as economic growth broadens; 3. Public finances very healthy. Large current account surplus 4. Risky assets and commodity prices correlate positively with NOK However, many forgets that the NOK is already historically strong and valuation is stretched according to models Market participants are usually too optimistic about the NOK ahead 12

13 EURNOK continues to range trade Trading between 7.70 and 7.95 for six months running EURNOK, resistance levels EURNOK 200 day moving average Sep Dec 09 Mar Jun Sep Dec 10 Mar Source: EcoWin, First Securities 13

14 NOK still too strong in relation to interest rate differentials But at the same time weak when looking at the oil price level NOK TWI and interest rate differentials Oil price and NOK TWI NOK TWI 2 y rate spread Source: EcoWin, First Securities 14

15 Taken together, the NOK should appreciate in the short term The NOK is now trading in the low end of our short-term valuation band NOK TWI vs. model fit The NOK TWI tends to be correlated with oil price, interest rate differentials and risk appetite in the short-term. An econometric model that combines these effects signals upside for the NOK going forward (the NOK is trading in the low end of the valuation band) Euro area debt concerns, and associated weaker risk sentiment, is the main downside risk for the NOK in the short term 15

16 EURUSD somewhat low in relation to interest rate differentials EUR hit by increased negative focus on sovereign debt in EMU peripherals EURUSD vs. interest rate differentials Government bond yields, spread to Germany 16

17 FX forecast table 3m forecast 12m forecast 20/5/11 Change Change Change Spot Change Spot Change Trade last week last month in 2011 forecast in % forecast in % Weights EURNOK % 0.7% 0.8% % % 0.39 SEKNOK % 0.1% 1.3% % % 0.21 GBPNOK % 1.3% -4.7% % % 0.09 DKKNOK % 0.7% -5.5% % % 0.08 USDNOK % 3.4% -4.8% % % 0.06 JPYNOK % 4.3% -4.5% % % 0.03 CHFNOK % 4.7% 1.3% % % 0.01 TWI % 0.8% -0.6% % % 17

18 GDP Preview: Investments to offset weak private consumption We expect Mainland-GDP growth of 0.7% between Q4 and Q1 Norges Bank and consensus expect 0.8% Our forecast corresponds to an annualized pace of near 3% Investments in housing and oil & gas should be key drivers of growth while growth private consumption and exports were sluggish in Q1 18

19 Forecast table, Norway Norway - forecast table Change y/y, average GDP Mainland (ex. oil & ship) Private consumption Mainland investments Oil sector investments Exports, goods, mainland Imports Source: 19

20 This document was prepared exclusively for the benefit and internal use of selected parties in order to evaluate the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure to any other party. This document is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by First Securities AS. This presentation may not be used for any other purposes without the prior written consent of First Securities AS. This presentation is not prepared in accordance with the requirements applying to investment researches. This document does not constitute or form part of an offer or invitation or recommendation to subscribe for or purchase any securities. The distribution of this document may be restricted by law in certain jurisdictions and person into whose possession this document comes should inform themselves about, and observe, any such restriction. Any failure to comply with these restrictions may constitute a violation of the laws of any such jurisdiction. First Securities AS shall not have any responsibility for any such violations. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued in connection with such offering. In preparing this document we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or otherwise reviewed by us. The information contained in this document has been taken from sources deemed to be reliable. We do not represent that such information is accurate or complete and it should not be relied on as such. Any opinions expressed herein reflect our judgement at this date, all of which are accordingly subject to change. First Securities AS accept no liability whatsoever for any direct, indirect or consequential loss rising from the use of this document or its contents First Securities AS and/or their employees may hold shares, options or other securities of any issuer referred to in this document and may, as principal or agent, buy or sell such securities. First Securities AS may have other financial interests in transactions involving these securities. 20