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: Riksbank vs Debt Office - SEK: ECB QE2 could be problematic for Riksbank - SEK rates: steep 1y+ govie curve - SEK rates: potential for a flatter SEK/NOK 2y/1y curve - ECB: ECB is back with its easing teasing - ECB: -3bp is no floor. How about Eonia fair values? - EUR: policy divergence theme is back 3 November 215

2 Chart of the week: QE and bond squeeze bought in QE as % of outstanding 1w repo rate minus policy rate, bps -35 Source:Nordea Markets The relationship between the amount bought in each government bond and how it is trading in the repo market is evident in the chart above 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 5/1s flattener over out-right longs. Covered bonds look overly cheap both versus govies and swaps. Government bond squeeze may continue but should be mostly priced in 5y and 1y benchmarks. FI Trade Ideas Govies (3-Nov) SGB 153/158 flattener. Squeeze in <1y tenors have left SGB 153 looking overly cheap. Relative curve (3-Nov) NOKSEK 2/1y flattener. A steeper NOK versus a flatter SEK 2/1y 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 158, 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 312/319) 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 1y BEI since it is below fairvalue. Previous edition (26 October) Strategy view on direction and curve: Riksbank to follow in footprints of dovish foreign CBs. Better risk-reward in 5/1s flattener over out-right longs. Covered bonds look overly cheap both versus govies and swaps. Government bond squeeze should continue but should be mostly priced in 5y and 1y benchmarks. FI Trade Ideas Index-linked (28-Aug) long 5y5y BEI (SGBi 312/319) 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 1y BEI since it is below fairvalue. Swaps (7-Sep) pay 1y1y, receive 5y5y. Compared to 5/1y curve and the govie SGB 158/153 curve, the SEK swap 1/2y curve looks to flat. Significant positive roll-down. Country spread (28-Sep) long SGBs 1y vs core EZ. Swedish 1y has underperformed despite ongoing bond squeeze. No doubt domestic data has been strong, but long-end should not be able to decouple overly much. Swap spread (16-Oct) sell SGB 158, 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. FX Trade Ideas AUDNZD (1-Oct) have you tried pinning down a kangaroo on a trampoline EURGBP (1-Oct) suckers for the pound despite Corbyn NZDUSD (12-Oct) - stop milking the Kiwi FX Trade Ideas AUDNZD (1-Oct) have you tried pinning down a kangaroo on a trampoline EURGBP (1-Oct) suckers for the pound despite Corbyn NZDUSD (12-Oct) - stop milking the Kiwi 3

4 SEK rates: Riksbank vs Debt Office Riksbank last week announced 65 bn in additional QE during H This was more than the 35 bn we had in our main scenario. At the same time, the Debt Office announced a smaller increase in the borrowing need for 216 than we had expected. No doubt a week with news bullish for government bonds Riksbank main take-aways More QE than expected (+65bn, bringing the total up to 2bn by end H1 216) Same easing bias and readiness to intermeeting action. Lower end-point in repo rate path. Wording in press-release points states that RB can buy more assets, but not explicitly more government bonds. 2 bn the limit of government QE? Debt Office main take-aways Borrowing need forecasted to be 78bn (17bn less than in previous report) 1bn in government pay-out to municipalities during 215 was not accounted for in the borrowing report. We had expected 6bn of increased borrowing , compared to the Debt Office forecast (adjusted for the additional 1 bn) of 7bn less borrowing. We believe that the borrowing need will need to be revised upwards going forward bought in QE as % of outstanding 1w repo rate minus policy rate, bps Source:Nordea Markets Market implications More QE and less government borrowing were bond bullish news indeed. Still we see value in ASW tighteners as excess liquidity continue increase and max repo squeeze is almost fully priced in some bonds (such as SGB 158s) More QE for longer period of time should be covered bond positive as well, and wide spreads offer good entry point. 4

5 SEK: ECB QE2 could be problematic for Riksbank Markets might start to discount ECB QE2 in November. EA s CA surplus is EUR-supportive, but is mostly recycled as fixed income chases relative real returns. While EA nominal yields are low and the correlation of EUR/USD with the 1y spread is often highlighted, the December-January move lower in EUR/USD coincided with spread tightening If EUR/USD drops, then the Riksbank will be less on guard re: EUR/SEK developments. Price action Implicit impact on trade-weighted krona (KIX) EUR/USD Symmetrical EUR move Statistical approach (constant correlation) EUR moves only vs CHF, CNY, GBP, JPY, USD Fed QE Fed QE BOJ QE ECB QE Average A symmetric EUR move would be highly problematic, but is quite unlikely Source: Nordea Markets What happens with the tradeweighted krona if EURUSD drops? It depends on how the EUR moves. If the market keeps trading EUR/SEK mostly on the SEK leg, then ECB QE2 will be good news for the Riksbank (the constant correlation approach) EUR moving mostly vs big peers is more likely 5

6 SEK rates: steep 1y+ govie curve Riksbank has not communicated any other plan than buying bond according to index-weights. This suggest that more QE buying of SGB 153 is in the pipe-line. Repo squeeze in tenors < 1y has steepened curve 1y+ and for example curve slope SGB 158/153 (~1y/24y) is at all-time highs as is the spread SGB 153 to Germany. No doubt there seems to be relative value in SGB Bought by RB Outstanding amount Net issued bn SEK Source:Nordea Markets -3-4 Barbell spread 147/158/153-5 German peer -6 SEK swap peer Nov12 May13 Dec13 Jul14 Jan15 Aug15 Source: Nordea Markets SGB 158/153 German peer SEK swap peer -15 Jan9 May1 Sep11 Feb13 Jun14 Nov SGB 153 vs Germany Tail spread SGB 158/153 vs Germany Source: Nordea Markets -15 Jan9 May1 Sep11 Feb13 Jun14 Nov15 Source: Nordea Markets 6

7 SEK rates: potential for a flatter SEK/NOK 2y/1y curve The Riksbank s unexpectedly long extension of the SGB QE program should indirectly put a flattening pressure on SEK 2y/1y. Furthermore, with the RB and the ECB both being ultra-soft, the probability for further action from Norges Bank is increasing (a rate cut a force for a steeper NOK 2y/1y curve). Also, market action since May has taken the relative curve to levels inconsistent with the 2y spread: even without NOK/SEK 2y spread tightening, the SEK/NOK 2y/1y could tighten by up to 2 bps. Linear regression SEK/NOK 2y/1y curve vs NOK/SEK 2y spread Start date SEK/NOK 2y/1y curve = a + b * NOK/SEK 2y spread End date a b R2 # observations ,63,56,76 σ 1,49,1 7,95 F statistics 1683 σ with lags steps: 7,94 Barrier 3,86 (significance =,5) Current pricing NOK/SEK 2y SEK/NOK 2y/1y Regression Deviation , ,6 19 7

8 ECB: ECB is back with its easing teasing Oil & FX will depress EA inflation by ~.3pp vs its Sep estimates, this after ECB in October. Crosses confirm lower EUR/USD is due to EUR, not due to USD. This matters for the doves within the ECB as it means the EUR is weaker due to ECB expectations, and not due to Fed expectations. Markets started to discount ECB QE1 ~5 weeks ahead of its formal launch. Similar timing would suggest it s time to discount QE2 now. While nominal yields are low and the correlation of EUR/USD with the 1y spread is often highlighted, the December-January move lower in EUR/USD coincided with spread tightening Select quotes by ECB Draghi: the NEER has been appreciating to a somewhat significant level (Oct-22) money markets adapted in a completely calm and smooth way to the new interest rate that we set a year ago; other countries have lowered their rate to much more negative levels than ours (Oct-31) 8

9 ECB: -3bp is no floor. How about Eonia fair values? The Eonia 1m swap vs depo spread has never been sustainably lower than 5bp, suggesting a possible Eonia 1m fwd bottom of -25bp if the ECB cuts the deposit rate by 1bp and signals -3bp is a new technical floor. While such a move would make implementing QE easier (easier to buy shorter-dated bonds due to higher yields) it would go against the whole purpose of lowering real and nominal rates. Hence we choose to believe the ECB will not rule out further deposit rate cuts beyond -3bp. Our indicative fair values for Eonia rates in different scenarios is shown in the table below. (EONIA - depo) (EONIA - depo) / (refi - depo) Dec-15 Jan-16 Mar-16 Apr-16 Jun-16 Jul-16 Sep-16 Oct-16 Dec-16 Jan Eonia 1m swaps y = x -.97 R² =.5795 y = x R² = Excess liquidity Jan13- Mar15- Power (Jan13-) Power (Mar15-) Source: Nordea & Bloomberg Assuming the Eonia-depo rate spread is affected by the refi-depo corridor, we outline fair values for Eonia in different scenarios. "Fair value" Eonia rates in different scenarios Today One depo cut One and a half depo cut Two depo cuts One depo + refi cut Two depo + refi cuts Eonia Depo Refi Source: Nordea Markets Assuming an Eonia-depo spread of 5bp, the most easing action is priced in after the ECB:s September 216 meeting = too late we think.25.2 y = x R² =.5934 Jan13-Feb15 Mar15- Power (Jan13-Feb15). -.2 Power (Mar15-) y = x R² = Excess liquidity Source: Nordea & Bloomberg Sources: Bloomberg and Nordea Markets 9

10 EUR: policy divergence theme is back The EUR/USD briefly became a risk-on pair as the Fed in September. investors stopped hedging equity exposure to EUR as the policy divergence theme came into doubt. Recent signals from ECB and Fed has strengthened the divergence theme however, and investors have started to hedge once more. Divergence theme tested in Sep/Oct Now, EUR s funding currency status has returned Investors buy more ETF:s which hedge (graph show ETF flows) Real rate spreads normally drive portfolio flows 1

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