Macro and Vol Commentary
- The Swedish economy is performing well compared to most other countries, with GDP in June at 4.5% Y/Y, and M/M data grew at 0.6% following a revised 1.2% M/M.
- The GDP indicator for Q/Q stands at 1.4% Q/Q for Q2, significantly above 0.7% Q/Q, which was expected.
- Y/Y growth was 4.2%, which is strong and remains high compared to other countries. Yes, growth is slowing but at a slower rate than other economies such as Europe and the U.S.
- GDP forecasts for Q2 are 3.3% for Sweden, which is robust.
- The economic tendency survey is at 101.3 and is falling from the previous level of 105.7, and this confirms the economy is slowing along with consumer confidence.
- Consumer confidence is declining and fell to 54.1, from 66.5. We expect this to fall further in the coming months as unemployment edges higher.
- Household consumption was strong in May at 0.7% M/M, up from -0.4% the month prior. The Y/Y is growing slower than at 5.2% in May, considerably down in April at 7.5%.
- Unemployment increased to 8.6% in June, up from 8.5% the previous month. PES unemployment was 3.1% in June.
- Youth employment in June 2022 at 21.3%, down from 21.6% and 21.9% the months prior.
- Wages of non-manual workers have increased 2.9% Y/Y, and while this is positive, it is considerably below inflation.
- This divergence in CPI and wage growth for non-manual workers will lead to a decline in retail sales and consumer confidence, especially with energy costs likely to increase in the coming months with Russia cutting gas, but oil prices are falling.
- However, one saving grace is that Sweden’s energy mix is 24.8% Nuclear, 24.6% Hydro, Biofuels & Waste 21.7%, Oil 17.3%, and Wind 6.6%, with the remaining oil and gas.
- This should protect Sweden from energy inflation.
- Swedish electricity prices have been trending higher and stood at 95.36 euros/Mwh, down from 156.71 in December, but we expect prices to hit this level again.
- CPI stands at 8.7% in Y/Y, with CPIF at 1.2% M/M in June, CPI M/M in June was 1.4%, inflation ex-energy at 6.1% Y/Y in June and 0.7% M/M in June.
- PPI stands at 25.6% in June on a Y/Y, increasing on an M/M basis by 2.5%.
- Despite CPI rising, the 10yr CPI-linked bonds fell to 2.88% on August 1st.
- Manufacturing PMI in July was 53.1, down from 53.7. While this is the weakest figure since July 2020, inflationary pressure is persisting as supply chain disruptions, delivery times were long, but new orders were still firm, with high output expectations.
- Private manufacturing grew steadily at 6% in May, up 0.8% M/M.
- The industrial sector struggled significantly and declined at -7.5% Y/Y in May, an M/M at -5.5%. This sector is a significant drag on economic growth, and the costs will rise due to electricity in H2 2022, causing more capacity to shut down and reduce margins.
- Services and composite PMI were 62.8 and 60.3; these figures are still declining but remain high compared to Europe, which stands at 50.6 and 49.4, respectively, and manufacturing PMIs was contractionary at 49.8.
The Swedish economy is still growing at a steady clip, and while it is slowing, the economy is considerably higher than other economies and the euro-area as a whole. The European economy is heading for recession much before Sweden, as evident from the economic data above. Some areas of the economy are slowing faster than others, such as the industrial sector and retail sales. The manufacturing sector is expansionary, but higher input costs such as electricity will reduce margins in the near term.
- The Riksbank increased its rates by 25bps in June to 0.75%, and members emphasised they would do what is necessary to curb inflation.
- This could trigger weaker economic development in the near term; however, growth is strong, giving them room to hike rates. This will mean rates increase in their next meeting; the probability of a rate hike is 464.6% (assuming a rate hike of 25bps, indicating they see 4.6 25bp hikes in one meeting), with the implied change at 1.162% currently meaning the interest rate would be 1.866%. We expect a 1% rate hike at this time, but it is data-dependent.
- The bank will reduce its security holdings faster than it decided in April.
- The Swedish 10yr yield is 1.284%, with the German yield at 0.766% and the European 10yr at 0.775%; the spread is likely to widen in the coming months as Swedish rates rise more sharply.
- However, the 5-7 yr bonds may be preferable for traders as growth falls and inflation is strong.
- A rate hike of 1% or more in the Riksbank would widen the disparity between them and the ECB, making growth significantly stronger in Sweden.
Europe is heading for a recession, and margins for companies in the euro area will continue to be squeezed as energy costs rise and electricity rise. Manufacturing is already contractionary in Europe, and end-user consumption is waning, but the saving grace is the employment market. The ECB raised rates by 50bps and will likely do the same in September, although data is significantly weaker and raising rates into a drastically slowing economy is less than favourable. We expect the spread between European and Swedish rates to diverge and 10yr yields to widen as Swedish growth is more robust than Europe. We favour selling EURSEK around 10.40; prices currently test resistance at the 200 DMA at 10.40, and if this holds firm, the downtrend will accelerate.
EURSEK Vol comment
- In the option space, short-term EURSEK realised volatility has been realising consistently lower than implied in the last 3 months.
- This has mostly been driven by growth forecasts being slashed on both fronts, with the European side expected to experience a recession much before Sweden, and both Central Banks concerned with inflation entrenching within the price-wage settings.
- In fact, the spread between 1-month implied and realised volatility has been trending between -3.5% and -2%, a signal suggesting selling volatility in the short-term.
- All in all, we favour selling volatility over the 1-month horizon.
Trade idea in 1-month (Exp 02/09/2022):
- Sell EURSEK Call, 10.41 Strike in EUR 10mio – Rec Circa EUR 64k.
- Buy EURSEK Call, 10.67 Strike in EUR 10mio – Pay Circa EUR 12k.
Total structure premium net receive EUR 52K Circa.
EURSEK 1-month Implied and Realised Volatility
USDBRL NDO Positioning Data 21/07/2022 - 28/07/2022
Options executed in the week to August 4th show a greater preference for downside exposure. Put options executed trade to a low of 4.70, suggesting downside appetite in the near term as we move into the election and also the prospect of a weaker dollar. On the upside, calls are traded up to 5.75 but most expire before October, however in the immediate term there is little upside exposure.
USDBRL NDO Positioning Data 27/07/2022 - 04/08/2022
USDCNY Vanilla Positioning Data 21/07/2022 - 28/07/2022
Options in the near term suggest that traders expect a continuation of the current trend. Calls traded have a range of 6.70 to 7.10, and all these have an expiry before November. Puts trade a narrow range with little cover below 6.60 throughout the whole period. This indicates prices are expected to trend higher.
USDCNY Positioning Data 27/07/2022 - 04/08/2022
EURSEK Positioning Data 03/07/2022 - 03/08/2022
Options traded show little conviction in the market with the range wide and notional values small suggesting little conviction. The large bubbles at the extremities around 11 on the upside and 10.20 on the downside suggest potential breakouts but in the immediate term there is little conviction. Chart number 2 shows a slight preference for the downside and this is in line with spot performance. We anticipate further losses from spot.
EURSEK Positioning Data 03/07/2022 - 03/08/2022
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
JP Morgan Global FX Volatility
The volatility index declined over the last week and the stochastics are falling sharply suggesting weak sentiment. This could trigger losses back towards the 50% fib level with the secondary level at 10.17. A breach of the 50% fib level would confirm the descending triangle. On the upside, the index needs to break back above the moving averages and this may prompt a test of 11.50. We anticipate the market to fall in the near term.
The index failed into near term trend resistance and this trigger losses back towards 105. In the immediate term if resistance at the moving averages hold firm this would confirm the trend on the downside and bearish candle. Superseding 105, support stands at 104.44. On the upside, the market needs to break out above the moving averages and trend resistance towards 106.75 and then 107. The stochastics are converging and this could trigger a buy signal which would improve the outlook in the near term.
The rejection of trend resistance at the beginning of the month has set the scene for lower prices through support at 10.40. The break and then reaffirmation of the now resistive 40 DMA suggests lower prices back towards the 50% fib level at 10.21. The MACD diff is converging on the upside and this may trigger another test of resistance around 10.40, the stochastics are falling and are still oversold. We expect prices to weaken in the near term.