Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Reading The Markets Sweden - 27 September 2019

By Danske MarketsMarket OverviewSep 27, 2019 05:05AM ET
www.investing.com/analysis/reading-the-markets-sweden--27-september-2019-200468602
Reading The Markets Sweden - 27 September 2019
By Danske Markets   |  Sep 27, 2019 05:05AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

  • Further signs of slowdown
  • Profit taken in SGBi 3109 BEI
  • Loss taken in NDH5532 (May 2021), receive SEK 1Y 1Y outright
  • October a challenging month for the krona
  • Trades

    Profit taken: in SGBi 3109 BEI at 150bp, profit 29bp.

    Loss taken: NDH5532 (May 2021) at -10bp, loss -12bp.

    New trade: Receive SEK 1Y 1Y outright at -8.5bp. P/L: -30bp/+7bp

    Danske Bank’s Market Views In A Nutshell
    Danske Bank’s Market Views In A Nutshell

    Further signs of slowdown

    The recent NIER business and consumer confidence survey basically reiterates earlier surveys. In part, the interpretation depends on whether you focus on levels (which the RB currently does) or the direction of data. As an example, looking at the private business sector in total, the NIER on one hand states that businesses’ views on current demand are still slightly better than the historical average. On the other hand, demand conditions have been on a downward trend over the last year.

    Comparing manufacturing and services producers we see a similar pattern as in the EZ. Manufacturers’ production plans are now about as downbeat as during the Euro-crisis. Services producers are not there yet, but expectations of future demand for the firms’ services in September were below the historical average for the ninth consecutive month.

    Manufacturers And Services
    Manufacturers And Services

    Looking at hiring plans, the picture is the same. Private businesses say that staff numbers have been about unchanged in the latest few months and hiring plans for the next few months are roughly unchanged as well. Manufacturing is an exception, with hiring plans close to the lows in 2012. How does this match with employment data which say that the number of employed and working hours have started to decline? We think the answer lies in the municipal sector. Data suggest that employment in this particular sector (which of course isn’t covered in the NIER survey) has dropped quite significantly of late and we suspect that this is explained by the fact that many local governments (unlike the central government) are under financial pressure. Notice that local governments are not allowed to run deficits. If deficits occur, corrective measures must be taken, by either raising taxes, or cutting costs.

    Back to the survey, we also observed that consumers’ expectations of unemployment over the next 12 months jumped to a six-year high. Honestly speaking this might very well reflect the intense media coverage of worsening labour market conditions. Nonetheless, it is worth keeping an eye on in case of potential second-round effects on big-ticket spending.

    Next Week’s Events
    Next Week’s Events

    Profit taken in SGBi 3109 BEI

    On the back of our CPI projection, on 7 June we initiated a position in BEI tightener (buy SGB1058 vs SGBi3109), then trading at an elevated 179bp. Only last week we reached the initial profit level at 160bp and decided to lower the level to 150bp.

    Looking at our near-term CPI forecast, we are approaching a period where we foresee some upward correction. We expect CPI y/y in September to decline only slightly from the current 1.44% y/y to 1.3% y/y. Thereafter we expect a correction, reaching 1.66% in January before turning down again (see chart below).

    Upward Correction In CPI
    Upward Correction In CPI

    As a result we have decided to close the position (@ 150bp with a profit of 29bp) for now, awaiting another opportunity to re-enter at a later stage.

    Loss taken in NDH5532 (May 2021), receive SEK 1Y 1Y outright

    During the week we have also reached our loss level in our position in NDH5532 (May 2021) @ -10bp. This feels somewhat ironic, as recent economic data if anything have supported our case for a repo rate cut. Also, the ECB and Federal Reserve have cut rates since the case was initiated on 29 August. Nevertheless, the market has interpreted the Riksbank as less dovish, and given the recent MPR, minutes and speeches the Riksbank have indeed sounded hawkish.

    However, we regard this as a result of the Riksbank’s communication policy. The policy states that Riksbank’s board members should stick to the official message until the minutes have been released. But more importantly, the communication policy states that after the minutes have been released, a board member “shall not, however, anticipate their own or the Board’s future decisions.” So let’s say a board member, following a bad set of data, are contemplating a rate cut at the next meeting. Given the constraints of the communication policy, our interpretation is that the board member in such cases cannot publicly state that they are about to change their mind. Thus, our conclusion is that the Riksbank might not actually be as hawkish as they currently sound.

    So to balance up our more rate bearish trades (FRA DEC20-21 steepener, 2Y-5Y swap steepener) we decide to add an outright receiving position in SEK 1Y 1Y, in addition to our spread position vs EUR in the same segment. As we reason above, not much is priced in on the RIksbank at the moment (-2bp in cuts over the next 12 months) – as the market remains torn between the weakening data and the still somewhat hawkish signals from the Riksbank. Thus, we feel that current levels (-8.5bp) are attractive for establishing new outright receiving positions. We set the P/L levels to -30bp/+7bp.

    SEK 1Y 1Y – Rate Cut Expectations
    SEK 1Y 1Y – Rate Cut Expectations

    October a challenging month for the krona

    October has historically been a challenging period for the SEK. EUR/SEK and USD/SEK have had a strong tendency to trade higher during the month. For EUR/SEK it has been a positive month (green in the chart below) every year since 2011 (which was when the euro crisis weighed on the cross). Since 2002, EUR/SEK has traded lower only in 2006 and 2011 (red in the chart). That makes October the single most negative SEK period with an average change of +0.56% over the last 20 years and +1.26% over the last five years. The October pattern is similar for USD/SEK, which also has risen every year since 2011. The average USD/SEK performance over the last five years is +3.09%. In terms of EUR/USD May is the most USD-bullish period, followed by October. JPY/SEK has also had a strong tendency to rise in October, as has AUD/SEK which is up every year since 2008, that is, 10 years in a row. Most other SEK crosses show a more mixed pattern.

    Seasonal Pattern In EUR/SEK
    Seasonal Pattern In EUR/SEK

    For those who want to base their investment decisions on this seasonal trading pattern, it seems like a good time to enter a short position in SEK vs EUR, USD, JPY or AUD.

    Importers and other natural SEK sellers should act early in the month whereas exporters and natural SEK sellers are advised to wait until the end of the month.

    But what is behind this strong seasonality? Our view is that it often can be explained by soft messages from the Riksbank, similar to what we have argued has been a key reason for the strong April seasonality. It was the case in 2014 (+15 figures on the Riksbank day), 2015, 2016 (+26 figures) and 2018. 2015 was on the verge of ending on a positive note for the krona, but the Riksbank changed that “at the last minute” with its decision on 28 October.

    Some years inflation disappointments have set the tone for October. Hence, we argue that macro triggers have often been the cause of SEK weakness in October.

    EUR/SEK Development
    EUR/SEK Development

    Macro triggers in the coming month and what potential they may have for the SEK:

    1 Oct. PMI industry has kept up better than expected in light of the collapse in Germany where PMI September printed 41.4. The latest Swedish print was 52.4. Here we would look out for a sharp drop, to below 50. Very important for EUR/SEK.

    3 Oct. PMI services. Watch out for contagion from the industry and the labour market alike. Somewhat important for the SEK.

    3 Oct. Speech by Riksbank’s Cecilia Skingsley. Very important for EUR/SEK.

    4 Oct. Speech by Riksbank’s Per Jansson. Very important for EUR/SEK.

    8 Oct. Industrial data. Weak global cycle in for Sweden important markets. Trade war has had a negative impact on global trade, which in turn correlates well with industrial production in a small open economy as the Swedish one. Somewhat important for the SEK.

    9 Oct. Prospera’s monthly survey has already dropped below 2% - 2-year expectations was last 1.7% - and risks falling further. This data is super important for the Riksbank and a worry for some Board members. Very important for the SEK.

    10 Oct. Inflation data. Our forecast is preliminary 1-2 tenths below the Riksbank forecast. Very important for the SEK.

    17 Oct. Labour market statistics. Surprisingly weak summer readings. Chance for correction in a positive direction, which may dampen the worst fears. However, our view is that the slowdown is and will be sharper than the Riksbank anticipates. Very important for the SEK.

    24 Oct. Riksbank rate decision. As far as the Riksbank is data dependent it is hard to see how it will not waver in its call for Dec/Feb hike. Very important for the SEK.

    25 Oct. Retail sales. Somewhat important for the SEK.

    30 Oct. NIER data. Somewhat important for the SEK.

    Overall, our view on macro data in the coming weeks is that they will add further pressure on the Riksbank and at the same time be a headwind for the SEK. Hence, our base scenario is that October 2019 will reinforce the seasonal pattern and put another green box in the chart above. Our 1M target is 10.70 and 3M (NYSE:MMM) 10.80.

    Reading The Markets Sweden - 27 September 2019
     

    Related Articles

    Reading The Markets Sweden - 27 September 2019

    Add a Comment

    Comment Guidelines

    We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

    •            Enrich the conversation, don’t trash it.

    •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

    •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

    • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
    • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
    • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
    • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
    • Only English comments will be allowed.

    Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

    Write your thoughts here
     
    Are you sure you want to delete this chart?
     
    Post
    Post also to:
     
    Replace the attached chart with a new chart ?
    1000
    Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
    Please wait a minute before you try to comment again.
    Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
     
    Are you sure you want to delete this chart?
     
    Post
     
    Replace the attached chart with a new chart ?
    1000
    Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
    Please wait a minute before you try to comment again.
    Add Chart to Comment
    Confirm Block

    Are you sure you want to block %USER_NAME%?

    By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

    %USER_NAME% was successfully added to your Block List

    Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

    Report this comment

    I feel that this comment is:

    Comment flagged

    Thank You!

    Your report has been sent to our moderators for review
    Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

    Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
    Continue with Google
    or
    Sign up with Email