Investment Research — General Market Conditions

13 December 2018

Danske Daily
Stock markets higher on more trade optimism
Market movers today Selected reading from Danske Bank
 Today is a very busy day. At 10:00 CET, we expect Norges Bank to stay on hold but
to confirm plans to tighten monetary policy in March. That said, the interest rate path  Sweden - Follow-up on CPI data
in the monetary policy report can be expected to be somewhat more cautious than in  Brexit Monitor: Brexit clash
September. See Scandi section page 2. postponed to January, at the
earliest
 At 13:45 CET, we expect the ECB to formally end the QE programme. While this is
(on paper) a hawkish policy move, we expect a dovish tightening as confirmation and  Macro Strategy Views Podcast:
The world in 2019 - slower
reassurance of an accommodative monetary policy stance going forward. We expect no
growth, higher inflation
new guidance on a first rate hike. The press conference begins at 14:30 CET where we
expect Draghi will try to be as ‘dull’ as possible. See ECB Preview: A new chapter of  OPEC+ agrees on big output cut
dovish tightening, 7 December.  Harr’s View: The world in 2019:
lower growth, higher inflation
 The EU summit will begin today with Brexit on the agenda. While the EU27 has said
they will not renegotiate the Withdrawal Agreement (including the backstop), they have  ECB Preview – A new chapter of
dovish tightening
indicated they will discuss how to help give UK PM Theresa May further assurance
that it is not in the EU’s interest to keep the UK ‘trapped’ in the backstop solution
indefinitely. The question is whether such an assurance is enough to calm UK Follow us on Twitter :
politicians so they will support the deal when put forward in the House of Commons.
@Danske_Research
 US initial jobless claims due out 14:30 CET will be interesting. Initial jobless claims
Video
have risen steadily from the bottom at 202,000 in September to 231,000 the last time. Danske Bank research playlist
While still low, an increase may add fuel to concerns the US economy is slowing.

 Swedish Prospera’s inflation expectations survey is due out at 08:00 CET and
unemployment data is due out at 09:30 CET.
Read more in Danske Bank’s recent
Selected market news forecasts and publications

Equity markets moved higher yesterday on renewed optimism on US-China trade  Nordic Outlook
talks. The positive sentiment continued in Asia with Chinese equities up close to 2% and
US bond yields higher. News broke yesterday that China may delay its ‘Made in China  Yield Outlook

2025’ strategy by a decade and replace it with a programme that promises greater access  FX Forecast Update
for foreign companies. See Bloomberg: China considers delaying high tech plans, 12
December. China also made its first major soybean purchase from the US, delivering on  Weekly Focus

the promise in the ceasefire agreement that China would immediately start buying US farm
products. See Reuters: China makes first big US soybean purchase, 12 December. We see
it as further confirmation that the two sides are very committed to reaching a trade deal this
time, although the ceasefire deadline of 1 March could be extended into Q2 if needed.

UK Prime Minister Theresa May survived a confidence vote last night. However, it is
really difficult to see where the Brexit saga will end. With this result, it has probably
become more difficult for May to get her deal through parliament even if she gets more
Chief Analyst
assurance from EU leaders. It is still our baseline scenario that a Brexit deal passes the vote Allan von Mehren
in parliament, most likely in January. But uncertainty will remain high in the short term. +45 4512 8055
alvo@danskebank.dk

Important disclosures and certifications are contained from page 2 of this report. https://research.danskebank.com
Danske Daily

Scandi markets
In Norway, it is time for the Norges Bank meeting. The interest rate path in the monetary
policy report can be expected to be somewhat more cautious than in September, as global
risks have increased and the oil price is lower. However, there is the clear prospect of
further above-trend growth in the economy together with higher capacity utilisation. As
long as these underlying inflationary drivers remain positive, Norges Bank will expect
gradual acceleration in wages and prices and so want to continue its gradual normalisation
of monetary policy. We therefore expect the bank to signal clearly that it is still planning a
March rate increase and anticipates further hikes during the forecast period.

In Sweden, we expect inflation expectations to remain well anchored close to 2% on all

horizons in the Prospera quarterly survey, thus providing an argument for the Riksbank to
go ahead with a first hike next week. Admittedly, the December hike was questioned by
yesterday’s inflation data with RIBA indicating 16bp for 25bp next week. However, we
think the Riksbank is somewhat eager to get started and therefore is inclined to look through
the recent inflation miss. Hence, we still look for 25bp to be delivered next week.

Fixed income markets

The main event today is the ECB meeting. How hawkish the ECB can afford to be at the
meeting given all the current risk factors is an open question. Hence, we expect a lot of
comments about being ‘balanced’, whether it is inflation, growth, Italy, Brexit, QE exit and
tapering, TLTROs, trade war etc.

The recent developments in Italy and France have been remarkable. Italy is now looking at
bringing the deficit down to 2% in 2019, while France is expected to increase the deficit to
3.4% in 2019. Furthermore, the first response to the increase in the French budget deficit
is not going to be something that the EU commission will be looking at before May 2019.
It has already stated that the French budget for 2019 was at risk of violating EU rules.

The increase in the French budget deficit gives a lot of leeway to Italy, as it is difficult to
penalise Italy without doing something to France as well. Hence, we have seen a significant
performance in Italy relative to peers. Our top trade buying 5Y Spain versus France has
performed well and could be combined with a long position in 5Y Italy versus France.

Norges Bank is expected stay on hold at the meeting today despite the higher inflation data
released earlier this week, but to signal a hike in March 2019. We believe this will lead to
more flattening of the Norwegian yield curve.

FX markets
First in the queue of central banks today will be the Swiss National Bank (SNB), which we
expect to aim at being as colourless as at all possible. EUR/CHF is again close to this
year’s lows and Swiss core inflation has been declining throughout the year, now at a mere
0.2% y/y. The SNB will not be happy with the level of either of these and thus while it is
welcomed that the ECB is taking further steps to ‘normalise’ policy, the SNB will want to
see inflation on a more sustained path before removing its focus from the overvalued franc.
Hence, we expect the SNB to keep the wording that the CHF is ‘highly valued’ and –
needless to say – to keep policy rates unchanged at -0.75%. The ECB will also aim not to
spark a significant market reaction but could, if anything, come out on the hawkish side
(see above). For the EUR, what is key is whether the ECB shifts its communication on
rates: while forward guidance is likely to stay time dependent (no hike this side of summer
2019), we stress that if liquidity measures are linked to the first hike, it would be EUR
supportive in underlining that rate hikes are next on the policy agenda (beyond a TLTRO).

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EUR/GBP dipped below 0.90 as Theresa May won the ‘no confidence’ vote last night.
Things are basically unchanged from the day before yesterday and focus now turns to the
EU Summit, where EU leaders will discuss Brexit today. There is still no majority for
anything in the House of Commons and the question is whether Theresa May can get
sufficient assurances in order to change some MP’s stance on the Brexit deal. As such, all
options still are on the table, including a second referendum and the risk of the deal not
being passed in the House of Commons remains intact. Hence, we expect EUR/GBP to
remain volatile and range bound in coming weeks.

EUR/NOK has risen moderately on the back of the disappointing inflation print in Sweden.
Now NOK focus turns to today’s Norges Bank meeting. Nobody expects a rate hike and
all focus will therefore be on the rate path. If we are right in our call (see above), we would
expect EUR/NOK to move back to the 9.60s upon the announcement. That said, the short-
term NOK potential should be fairly limited in the current environment given investor focus
on historical year-end vulnerability. However, it would underpin the NOK attractiveness
from a 2019 perspective and support our case for gradually building NOK longs in
December. We remain short EUR/NOK (3M seagull) and long the NOK/SEK spot outright.

As we expected, the inflation data yesterday sent EUR/SEK higher. The sell-off in the SEK
was reasonable given the heightened uncertainty of a December hike. While we
acknowledge this uncertainty, we still think the Riksbank will move in December (though
at the same time perhaps adjusting the repo rate path lower). In addition, PPM money may
have helped push the cross higher, given the normal seasonality around the PPM date,
which occurred yesterday. The PPM date has often marked the local peak in EUR/SEK. In
all, we think EURSEK will move lower through the end of the year. A serious test of the
10.16 support level (6 December low) before year-end is still feasible, in our view. Hence,
from a trading perspective, we maintain the recommendation to sell on rallies towards the
10.40 area. Today, the SEK may take some direction from Norges Bank and the ECB while
the Prospera inflation survey is seldom a true market mover.

Key figures and events

Source: Bloomberg, Danske Bank

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Report completed: 13 December 2018, 06:36 CET

Report first disseminated: 13 December 2018, 07:15 CET

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