The EURSEK is now trading at the same level as it did at the end of the great financial crisis, and the same is basically true for the KIX index. The combination of the low reading for inflation in January and uncertainty in equity markets is guiding the SEK lower and lower. Still, if the next inflation number is in line with expectations, or higher, it is hard to see the Riksbank changing the current repo rate path at the upcoming April meeting, as long as the EURSEK remains elevated. This will be positive for the SEK and we therefore stick to our forecast of a lower EURSEK.
• Kommuninvest K2311 included in HMSC
• Duration changes in HMSC13, HMSM13, HMSM35 because Stadshypotek 1584 and SCBC 142 become shorter than three years
• Indices will rebalance 2018-04-09
Weaker outcomes in leading industry indicators coupled with higher risk aversion are putting downward pressure on bond yields. There is a risk that the global PMI will continue to fall ahead, and even though it is still high, turning points tend to be indicative of the market. The risk that US bond yields will continue to fall has increased. Meanwhile, we are now at the lower end of the range for Swedish bond yields seen over the past few months. We will hold steady with our recommendation for short duration, but see potential for higher interest rates, especially at the short end of the curve.
Trump, Xi and MBS
Following a two-year rise in prices, fully in line with the global economic expansion, with the strongest synchronised growth in years, politics now appear to be taking over. President Trump is introducing tariffs on steel and aluminium in the world's strongest economy. Xi Jinping will likely be president for the rest of his life, leaving him free to pursue his priorities in what is the world's largest producer and consumer of commodities. Meanwhile, Crown Prince Mohammed Bin Salman has outmanoeuvred his opponents in Riyadh and is ruling OPEC with an iron fist. If the economic climate drove commodities to this point, politics will have a greater influence moving forward.
China's decline deferred
Although the expectations of China's performance in 2018 have been low, the data has proved a pleasant surprise so far. There was uncertainty regarding the growth target since Xi has focused less on this lately. However, the growth target of "around 6.5%," remains in place, compared with the target of "around 6.5% or higher if possible" that was stated in 2017. The significance of the growth target has been played down, but the fact that it remains means that China will continue to steer its economy toward this target moving forward, probably until 2020, we believe.
OPEC gets a free ride due to Venezuela's collapse
Adherence to the agreement on production curbs by OPEC rose to 147% in February, the highest since the agreement was introduced in January 2017. The crisis in Venezuela is accelerating and reducing oil production so much that the oil market may approach a market balance deficit during the year. Venezuela is the reason that OPEC's adherence is nearly 50% higher than agreed. Even though we still think the oil price is on its way down, we raise our forecast for year-end 2018 from USD 50 to USD 55.
The giant leap in the Libor-OIS spread has puzzled us all. More and more analysts have concluded that the widening spread is due to a temporary oversupply of T bills (among other things) and that it will soon pass with limited effects on credit markets. We largely agree but remain alert in case the situation deteriorates. Whatever the outcome, we view the USD as the ultimate winner.