In a week where the Russia-Syrian conflict escalated and the US-China trade issue continued to linger , oil drifted higher and the US dollar weakened; euro-zone short-end rates were lifted by hawkish ECB comments, whereas equities overall saw muted moves across regions. Despite the risks mounting from weaker growth, geopolitics and the trade issue, volatility has stayed subdued across equity, rates and FX markets.
Scandi inflation misses
The loss of growth momentum globally has gained further traction, as Chinese indicators continue to weaken, see China Leading Indicators - More signs of (moderate) slowdown , 11 April 2018. Inflation data in the Scandi region came out on the weak side of expectations in Sweden, Norway and Denmark alike and thus added to the sense of cyclical weakness in this region as well. Indeed, on top of the geopolitical and trade-war risks, the global cycle remains a lingering concern for risk assets in general and the Scandi currencies in particular.
We still expect notably Norway to fare better than Sweden growth-, inflation-, and housing-wise as 2018 progresses . While we could see a pause in the repricing of the Riksbank near term, we still like to receive Swedish rates in the short end and pay further out on the curve for a steepening of the curve. EUR/SEK continues to hover at elevated levels (10.30ish) and fundamentals increasingly suggest the pair is overbought. The risk of deteriorating risk sentiment is a challenge for both SEK and NOK, but we still expect the Norwegian economy to outperform the Swedish one, allowing Norges Bank to move significantly before the Riksbank on the first hike. Hence, it still seems premature to see a SEK bound.
US and equities holding up well
The US has so far fared somewhat better than elsewhere with decent inflation figures this week and notably a healthy job report for March. This is probably one reason the USD has held up well when risk sentiment has soured on cyclical worries. The FOMC minutes this week showed a Fed on autopilot, in the sense that rates are heading higher still and the balance sheet lower, notwithstanding global growth weakness and tighter USD liquidity. We still think the Fed will deliver two more hikes with risks tilted in favour of a third, and we look for a steeper money-market curve still. The start of the earnings season not least in the US may provide some comfort for risk sentiment though, as we expect this to start on a markedly positive note. Global equity markets have come down around 10% since the peak this year and we maintain that equities remain a buy due to a strong earnings uptrend and non-existent recession risks.
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