A few of our trades are more or less supported by a risk-on mode in the market. However, following the solution offered to Cyprus, the outlook is vague once more. Specifically, the ‘solution’ means a scrapping of the much-hailed European banking union of the last years. We feel this is not very supportive of the risk-on mode, short or long term.
Neither can we disregard the erratic political situation in Italy. Having no stable government in one of the major euro countries is far from ideal, even though there is no need in the short term for additional fiscal tightening.
We still expect Swedish macro figures to continue improving and to surprise on the upside. There is a possibility that the Riksbank could start signalling earlier rate hikes. In our view, the FRA curve remains extremely flat and expectations on the Riksbank are much too modest. We have noticed a tendency to lump the Riksbank together with other central banks pursuing aggressive monetary easing. Sweden’s economy is far more solid and could probably withstand an increase in the repo rate. The Riksbank remains concerned about households’ indebtedness and credit demand is still increasing too fast, as the economy seems to have bottomed out. The labour market has improved more than we expected.
On the short term, we acknowledge that the correlation between Bunds and the Swedish money market has been high (see charts). Also, in the very short term, the next batch of Swedish data is not due until 27 March. This speaks in favour of reducing risk exposure for now.
We close our FRASEP14 outright position, where we have been payers. We also reduce risk allocated in the FRA steepener for now. We will wait to see how the situation unfolds from here, but we are ready to add more risk again. The damage is already done in Cyprus regardless of what is decided for the deposit guarantee or the result in Cyprus’s Parliament. So far, we still think the market underestimates how quickly the Riksbank will try to move towards hikes, but we will not place too much risk in such a positioning for the moment. We remain skewed towards a 2/10s curve flattener in Sweden, both outright and relative to the U.S. and Germany.
To Read the Entire Report Please Click on the pdf File Below.
Neither can we disregard the erratic political situation in Italy. Having no stable government in one of the major euro countries is far from ideal, even though there is no need in the short term for additional fiscal tightening.
We still expect Swedish macro figures to continue improving and to surprise on the upside. There is a possibility that the Riksbank could start signalling earlier rate hikes. In our view, the FRA curve remains extremely flat and expectations on the Riksbank are much too modest. We have noticed a tendency to lump the Riksbank together with other central banks pursuing aggressive monetary easing. Sweden’s economy is far more solid and could probably withstand an increase in the repo rate. The Riksbank remains concerned about households’ indebtedness and credit demand is still increasing too fast, as the economy seems to have bottomed out. The labour market has improved more than we expected.
On the short term, we acknowledge that the correlation between Bunds and the Swedish money market has been high (see charts). Also, in the very short term, the next batch of Swedish data is not due until 27 March. This speaks in favour of reducing risk exposure for now.
We close our FRASEP14 outright position, where we have been payers. We also reduce risk allocated in the FRA steepener for now. We will wait to see how the situation unfolds from here, but we are ready to add more risk again. The damage is already done in Cyprus regardless of what is decided for the deposit guarantee or the result in Cyprus’s Parliament. So far, we still think the market underestimates how quickly the Riksbank will try to move towards hikes, but we will not place too much risk in such a positioning for the moment. We remain skewed towards a 2/10s curve flattener in Sweden, both outright and relative to the U.S. and Germany.
To Read the Entire Report Please Click on the pdf File Below.