risk sentiment

EUR: Range-bound into next week EUR/USD softened on the BoC rate hike yesterday as the implications for Federal Reserve policy proved the larger driver. The softening in EUR/USD did mask some further hawkish rhetoric, where the European Central Bank's influential Isabel Schnabel was still sounding pretty hawkish. Please see our full ECB preview here.   Today's session sees some revisions to eurozone 1Q GDP data - expected to be revised down after German figures. However, the market still looks comfortable pricing in two further 25bp ECB rate hikes by the late summer. Expect EUR/USD to remain becalmed well within a 1.0650-1.0750 range.   Elsewhere, we hear from Swiss National Bank (SNB) President Thomas Jordan at 1405CET today. The SNB is widely expected to raise the policy rate by 25bp to 1.75% on 22 June. Recent CPI releases have, though, shown core inflation dipping below 2.0% - a move that reduces the need for the SNB to drive the nominal Swiss franc any stronger. EUR/CHF could drift to 0.9800 should President Jordan acknowledge that better CPI trend today. Chris Turner     We have updated our calls on Norges Bank and NOK. As discussed in this note, we now expect Norges Bank to take rates to 3.75% (two more hikes from current levels) on the back of NOK’s weakness and we see non-negligible risks of a 4.00% peak rate. The short-term outlook for the krone remains clouded: the threat of more Fed tightening is keeping the illiquid and high-beta NOK under pressure, and domestically Norges Bank daily FX purchases have only been trimmed marginally in June. We expect rate hikes and potentially larger cuts to FX purchases later this year to pair with a solid set of fundamentals and a stabilisation in risk sentiment and bring EUR/NOK closer to 11.00 in late 2023.

Outlook for bond yields and the AUD It has been a volatile 12 months for the Australian dollar, which dropped as low as 0.617 intraday against the US dollar in September 2022 and reached as high as 0.716 in February this year. Currently, the AUD is sitting in the upper half of this range. Further volatility is probable. The combination of a turn in global central bank rates, a pick-up in risk sentiment, and China’s reopening, all point to a stronger AUD in the medium term. Still, the long-awaited weakening of the USD is proving very elusive. Global risk sentiment, as proxied by the Nasdaq, which is up more than 25% year-to-date hardly needs any further encouragement and may be due a re-think if analysts’ earnings forecasts finally start to price in recession. And China’s reopening story may prove to be a case of the dog that didn’t bark. That makes the argument for further volatility seem a stronger one than our directional preference.     We feel on stronger ground on bond yields. Australian government Treasury yields track US Treasuries closely, so the broad direction is likely to be driven by those, with local factors (RBA policy, Australian inflation etc) of second-order importance though still useful for considering the direction of spreads. And right now, with US Treasury yields up at around 3.80%, the balance of risks for lower bond yields certainly feels better than it does for higher yields. The current spread of Australian government bond yields over US Treasuries is about 20bp, and this could widen as we think the US inflation story will improve quicker than that in Australia, resulting in a more rapid return to easing in the US.       Summary forecast table

Norges Bank turns hawkish in fight against weaker krone Norges Bank has not only hiked rates faster than expected this month, but is also signalling plenty more tightening to come. We suspect the newly forecasted peak rate of 4.25% will be hit by the end of the third quarter. This puts NOK in a stronger position, especially against its closest peer SEK.   Norway’s central bank has hiked rates by 50 basis points, more than the 25bp that was expected – although in truth the consensus was pretty divided. What really stands out is the new interest rate projection, which is the output of Norges Bank’s model and shows where policymakers expect rates to go over the coming months. Back in March, that pointed to a peak rate of 3.5%, which implied the bank would have hiked by 25bp this month before pausing. Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that's a pretty big revision. To some extent that’s not surprising, given that the last set of forecasts came amid the US banking crisis. Global interest rate expectations have since recovered, which mechanically pushes up Norges Bank’s forecast for its own policy rate. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank's model.   Norges Bank has increased its interest rate projection – again   But the central bank also says that higher-than-expected inflation and wage growth will also force it to do more – and interestingly it’s this which accounts for most of the upward revision to interest rate projections this year, according to a chart in the Monetary Policy Report. The bottom line is that the central bank expects another 50bp of rate hikes from here, and whether we get that in one burst or two 25bp increments probably depends on whether the krone depreciates further from here. It’s worth noting that the new forecasts assume a gradual appreciation over the coming quarters. Either way, we suspect the newly-forecasted terminal rate of 4.25% will probably have been reached by the end of the third quarter. Further hikes over and above that can't be ruled out.     One more reason for NOK outperformance over SEK The blowout hawkish surprise by Norges Bank today – both in the magnitude of the hike and the rate projection revisions – puts NOK in a relatively strong position against other high-beta peers. That is because monetary policy divergence has become an increasingly more relevant driver for FX, and if indeed we see the Federal Reserve cycle coming to an end and FX volatility decline, the search for carry will reward currencies with more attractive implied rates.   Looking at EUR/NOK, it is still too early to call for a sustained downward trend, despite Norges Bank’s ultra-hawkish turn. That is because the ECB is keeping the euro idiosyncratically strong, NOK is still the least liquid G10 currency (so the most exposed to corrections in risk sentiment) and because Norges Bank has been less NOK-supportive on the FX purchase side (July announcement next week) than it has been on the monetary policy front.   We see NOK outperform SEK for now, considering the Riksbank should struggle to deliver a similar hawkish surprise given domestic economic woes. We might see a jump to 1.03 and even 1.04 in NOK/SEK in the near term, should the Riksbank fail to offer a floor to SEK. EUR/NOK remains, in our view, vulnerable to some upward corrections in the coming weeks, but if Norges Bank delivers on its plans to take rates to 4.25% (i.e. above our estimated ECB peak rate), then EUR/NOK can trade below 11.00 before the end of this year.

SEK: A high wire act for the Riksbank today EUR/SEK remains close to historic highs as the Riksbank prepares to announce a key monetary policy decision this morning. As discussed in our meeting preview, the performance of the krona is a primary source of concern for the Bank, but also a relatively “self-inflicted” pain. The dovish shift at the April meeting – when two Board members voted against a 50bp hike – left the krona unshielded from risk sentiment dynamics and above all, mounting domestic risks (particularly those related to a troubled property market). The key question today is whether the hawkish rhetoric that had supported the krona into April will somehow be rebuilt. Market pricing suggests a 50bp hike had been factored in the weeks leading to today’s announcement (a peak of 40bp was reached last week), and the OIS curve now prices 35bp for today and 46bp in total by the September meeting. We think that the recent financial turmoil hitting property company SBB and the more general fragile state of Sweden’s economy and property outlook would argue against a 50bp hike today, but we cannot fully rule it out. To prevent another SEK drop, a 25bp hike would need to be accompanied by signals in the rate forecasts and in the statement that the bank is ready to hike rates further. Another option – which has actually been hinted at by one of the dovish dissenters – would be to accelerate the pace of quantitative tightening. That should be a preferred solution to the third option - FX intervention – which may prove unsustainable and unsuccessful. We suspect there are limitations to the currency impact of faster QT, which would squeeze the back-end of the SEK curve but may leave the EUR-SEK short-term rate differential too wide (considering how hawkish the ECB is) unless the Riksbank pushes forward some rate hike pledges. Expect EUR/SEK volatility today: we suspect there are some upside risks and a move to the 11.85/11.90 level is possible as the Riksbank may fail to make a structurally SEK-bearish market change its mind. By contrast, should we see a resolutely hawkish tone, EUR/SEK may slide back below 11.70. As we have learned from the April meeting, the spectrum of surprises can be quite wide with the Riksbank.  

CEE: Global conditions boost the region This week in the region offers only secondary data and should bring some calm. Today we will see core inflation in Poland. We expect a drop from 11.5% to 11.1% year-on-year. Tomorrow in the Czech Republic, PPI numbers for June will be released. With the August CNB meeting also approaching, we can expect the first comments from board members trying to fight dovish market pricing. Thursday will see the release of wage and industrial production statistics in Poland. IP fell by 2.2% YoY according to our estimates, more than the market expects. Nominal wage growth has stabilised at low double-digits at 12.1% YoY. Poland's retail sales numbers will be released on Friday and we expect a 5.5% YoY decline, also slightly more than the market expects. CEE FX showed a strong rally last week – especially the Hungarian forint due to global conditions. We expect the same story this week. The region should still benefit today from EUR/USD's move higher late last week. Sentiment remains open to risk and the renewed fall in gas prices to the lowest levels since early June is playing into the hands of the Hungarian forint in particular. The calendar in the region has little to offer and so the main focus will be on the global story. Overall, we expect further gains across the region albeit at a slower pace. The Hungarian forint remains our favourite in the CEE region. We expect the forint to strengthen further below 373 EUR/HUF. However, we also expect further gains from the Polish zloty and Czech koruna with moves below EUR/PLN 4.40 and EUR 23.70/CZK.

Norges Bank hikes rates and signals a final move in September Norway's central bank is poised for one final rate hike in September, and with other major central banks either at or close to the peak for policy rates, the impetus to raise rates further is fading. The domestic backdrop continues to improve for the krone.   Norges Bank hikes to 4% Norway’s central bank has hiked rates by 25 basis points to 4%, and is continuing to signal that it has one final move left in the tank for September. None of this will come as a huge surprise, given that since Norges Bank’s (NB) larger 50bp hike in June, the krone has appreciated and is currently running 1.5% stronger on a trade-weighted basis than NB had assumed in its most recent projections. Inflation has also come in broadly in line with its expectations, and importantly has tentatively begun to come down from the 7% peak reached by underlying inflation in June. The latest statement points to an increasingly neutral bias for rates, with policymakers hinting at additional hikes if krone weakness returns, or earlier/steeper rate cuts if the economy starts to creak. While we don’t get a new rate projection this month, the last set of forecasts saw the policy rate peaking at 4.25% later this year and there’s little reason to doubt that. With other central banks likely to have either finished hiking already (Federal Reserve) or getting close (ECB), the impetus to keep hiking beyond September is likely to fade.   More good news for the krone NOK is moderately stronger after the Norges Bank announcement, largely due to markets having underpriced the chances of more rate hikes beyond August. External factors are set to remain dominant for the illiquid NOK, but a period of stabilisation in risk sentiment can make domestic drivers emerge and dramatically increase the attractiveness of the krone. We remain constructive about a broad-based rally in the undervalued NOK before the end of the year and in early 2024, and the commitment to more tightening by Norges Bank likely limits the scope of any large corrections. We expect the 11.00 level in EUR/NOK to be tested before the end of the year.

The everything selloff By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The global selloff intensified yesterday, after the FOMC minutes released Wednesday highlighted that the Federal Reserve (Fed) continues to see significant risks to inflation. And if that's not enough, Atlanta Fed's GDPNow printed an eye-popping growth forecast of 5.8% for Q3 on Wednesday, up from 5% printed a day before. Atlanta Fed computes this number using the data available to them at a time t, therefore the number is not necessarily accurate, but it reflects the positive data released lately, and fuels worries that with such a strong growth, the US inflation could only make a U-turn and take a lift. Yesterday, the Philly Fed index printed a surprisingly strong number, as well. This is why, we continue to see the upside pressure in yields persist, in the US and around the world, though we saw some respite in the US 2-year yield that bounced lower from the 5% mark earlier in the week, and the 10-year yield spiked above 4.30% before falling back to 4.25% this morning.   But note that there is more to this story. Long story short, the US Treasury has been printing a lot of T bills lately, and fell well behind the government bond issuance, and the latter helped keeping US liquidity well contained since the US exited its debt ceiling crisis after which the Treasury started refilling its general account. That was supposed to pull liquidity away from the market. But in the meantime, the Fed was pushing liquidity into the system by reverse repo operations, allowing the money market funds to buy T bills and release cash. The problem is, nowadays, the percentage of T bills approaches the 20% level, which is a self-induced limit for the Treasury, and the Treasury will shift back to issuing bonds, instead of T bills. The latter will increase the amount of sovereign bonds in the system at a time the Fed is decreasing its balance sheet by QT, and the banks don't necessarily want to buy bonds either. So, the increasing supply, and the decreasing demand for US sovereigns will be one major force pushing the US yield curve higher. And if the strong economic data translates into higher inflation, the impact on yields will likely be higher. So, yes, the US 30-year yield is at the highest levels since 2011 and that looks appetizing, especially if the risk sentiment sours – due to multiple reasons ranging from geopolitical tensions to China worries – but the downside risks in the US sovereign bonds market prevails. And Bill Ackman said earlier this month that the 30-year yield could hit the 5% mark.  And the upside pressure in sovereign yields is true for other parts of the world as well, because obviously when the US coughs the world catches a cold. More precisely, higher US yields also translate into a stronger US dollar, and a stronger US dollar is inflationary for the rest of the world. If nothing, the energy and raw material prices that are negotiated in USD terms on international markets simply become more expensive when imports are reverted back to local currencies, and that, alone, is enough to push inflation higher in the rest of the world when the US dollar appreciates. The EURUSD fell to 1.0856, the AUDUSD slipped below 64 cents and the USDJPY spiked above 146.50. The correction is in play this morning and we could see the US dollar retreat further into the weekly closing bell, but the stronger dollar trend is clearly in play and it is worrying. Looking at yields elsewhere the US, the 10-year gilt yield has now surpassed the levels last seen during the Liz Truss induced disaster peak and is headed toward the 5% psychological mark while the German 10-year yield hit 2.70%, a level last seen in 2011 as well. Even the Japanese 10-year yield, which is controlled by the BoJ and should not exceed the 50bp benchmark by 'too much', goes up significantly.  As a result, the selloff in equities deepens. The S&P500 sank to 4370 yesterday and is getting ready to test the minor 23.6% Fibonacci retracement on October to July rally, and the base of that positive trend, while Nasdaq 100 is no more than 8 points from its own 23.6% retracement and already fell below the ascending trend base. The Stoxx600 slumped below the 200-DMA and is flirting with its own 23.6% retracement level, and the Japanese Nikkei, which was one of the rising stars of the year, and which recorded a rally past 30% since January, has fallen below its 23.6% retracement and is preparing to test the 100-DMA.   And note that this simultaneous selloff in stocks and bonds is a sign that the market liquidity is draining. Bitcoin, which is a gauge of market liquidity, slumped more than 7% yesterday and traded close to the $25K level. According to CoinGlass, $1 billion left cryptocurrencies over the past 24 hours and Bitcoin suffered almost half of the liquidations.   

GBP: Unlucky bystander The lack of domestic data releases has left the pound moving merely in line with global dynamics. Yesterday’s drop in the dollar sent Cable above 1.2650, a smaller rally compared to other peers. This morning, GBP/USD is inching lower along with other dollar crosses, although it appears that the pound’s sensitivity to risk sentiment is a bit more limited at this moment. EUR/GBP is the pair to watch today as inflation data in the eurozone are released. The pair broke above 0.8600 yesterday, and signs of resilient inflation in Spain and Germany could see the rally extend to test the 0.8640 100-day MA.   On the UK side, it will be worth watching mortgage approval figures for July along with other credit statistics. Surging rates and declining demand for loans have already triggered a house price correction in the country.

EUR: Fragile before a potential ECB surprise Aside from any potential revision in the PMIs (August’s final release today), the eurozone’s calendar is rather quiet on the data side. It will be, however, quite interesting to hear what ECB speakers will have to say about the latest inflation numbers in the last two days before the pre-meeting quiet period kicks in.   We’ll hear from both sides of the spectrum today: the hawk Isabel Schnabel and the dove Ignazio Visco. Despite the resilience in headline inflation, markets focused on the consensus deceleration in August’s core inflation and have cut back expectations of a rate hike in September, currently priced in with an approximate 25% probability. Our economics team is calling for one last hike next week, meaning we are expecting a EUR/USD rally to materialise thanks to an ECB hawkish surprise, but before then EUR/USD looks quite fragile. We might see the 1.0700 support being tested before the ECB meeting, should risk sentiment stay soft. Francesco Pesole

At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.      

At -0.78 (vs -0.83 last week) our Risk Index has pulled back a little from elevated levels indicating significant risk-seeking behaviour by investors. The downward trend in the Index is decelerating. The pillars of the recent improvement in risk sentiment are (1) slowing US inflation and (2) investors’ hope that the Fed is likely finished hiking rates or very close to the end of its tightening cycle. Some recent events have dented this hope, including rising food prices on the back of El Nino and higher oil prices on the back of Saudi Arabia & Russia deciding to extend their voluntary production cuts. Higher food & energy prices threaten a re-acceleration in inflation and at the very least high rates for longer or worse a return to Fed rate hikes. Today’s US headline inflation data will be supported by higher energy prices, which will leave investors focusing on the core inflation data for evidence of further deceleration in inflation. Investors are understandably nervous ahead of this data release. The largest contributors to the rise in our Risk Index were rising Sovereign-EM spreads as well as the outperformance of cyclical stocks by defensive stocks. Rising FX market volatility also contributed to the rise in the Index. Falling credit spreads and gold prices restrained the rise in our Risk Index. The CAD is the G10 currency most sensitive to our Risk Index, followed by the GBP and EUR. These currencies are negatively correlated with the Index. The JPY & SEK are the most positively correlated currencies with the Index.        

AUD: labouring away The AUD has benefited so far this week from policymakers’ efforts in both Japan and China to resist further currency weakness. The AUD, acting as a proxy for the CNH for investors, has especially benefited from the PBoC’s strong stance against further CNY weakness. The real test for the AUD will come from today’s US CPI data, however. The currency would receive a double whammy from an upside surprise in US inflation: (1) a weakening due to higher UST yields; and (2) the concomitant decline in risk sentiment with higher UST yields. A further strong stance by the PBoC against more CNY weakness on the back of an upside surprise in US CPI data would further push investors into using the AUD as a proxy for CNY weakness. Australia releases its August labour market data on Thursday. This data is likely to be more of a background driver of the AUD. The RBA made clear last week it maintains a modest tightening bias and with the market pricing in about a one-in-three chance of another 25bp rate hike by the RBA this tightening cycle, the risks around the data are skewed to the upside for the AUD. Leading indicators for the labour market have softened, suggesting that Australia’s unemployment rate will continue to drift higher as employment growth slows.  

FX Daily: A dovish hike ahead of a hawkish hold The ECB hiked rates yesterday but offered enough hints to convince markets this is the end of the tightening cycle. EUR/USD sensitivity to the dollar leg and – by extension – US activity data should be even higher at this point. Elsewhere, some BoJ members have reportedly pushed back against hawkish interpretations of Ueda’s comments earlier this week. USD: Starting to gear up for a hawkish Fed meeting The dovish ECB hike (more in the EUR section below) and another round of strong US activity data sent the dollar on another rally yesterday. US August retail sales rose more than the consensus (0.6% month-on-month), even though the bulk of spending growth was due to higher gasoline prices. When stripped of fuel sales, the print was a more modest 0.2%, although still higher than expected. PPI was also higher than expected, while initial jobless claims were slightly changed (216k to 220k) after last week’s big drop. With the ECB meeting now past us, market attention will shift to next Wednesday’s FOMC announcement. Evidence of slower disinflation has provided an incentive to keep one hike in the dot plot projections for the end of 2023, while resilient US data may well see a revision higher of the 2024 median plot (currently embedding 100bp of easing). We doubt that sort of adjustment would come as a shock to markets, but would further discourage bearish positioning on the dollar. Today will see the final bits of data that can move markets before the Fed meeting. The University of Michigan's sentiment indicators are expected to decline, but inflation expectations remain unchanged. Empire Manufacturing is improving, while industrial production should slow down on the month-on-month read. It looks unlikely that these releases can materially affect expectations for next week’s meeting when a hold appears a done deal, and all focus will be on new projections and forward-looking language. The next resistance for DXY is the 105.85 March high: beyond that, it would explore levels last seen in November 2022. Today is starting on a more risk-supportive tone in FX, as China’s August industrial production and retail sales both surprised to the upside, fuelling expectations that the worst may be behind us on the Chinese data flow. The dollar may correct a bit lower today, but the risks remain skewed towards further strengthening in the near term, or at least until the US activity picture starts to show some cracks.  

The uranium spot price is continuing higher due to supply concerns and improving demand outlook for nuclear power plants driven by construction pipeline in Asia. Our nuclear power theme basket is getting closer to overtake semiconductors as the best performing theme basket in 2023. On the flip side, our bubble stocks basket is under pressure from rising US bond yields and waning risk sentiment in AI-related stocks.   Key points in this equity note: Offshore wind and green transformation technology have had a bad year due to rising bond yields and high energy costs making steel and concrete expensive leading to waning appetite from investors. Nuclear power is getting closer to overtake semiconductors as the best performing theme in 2023 as governments are realizing that nuclear power is critical to achieve zero-carbon emission goals. Bubble stocks are under pressure from higher US bond yields and risk sentiment in generative AI stocks declining. Nuclear theme is steadily advancing as best theme in 2023 This year has been a catastrophe for wind turbine manufacturers such as Siemens Energy and Vestas. On the development side, Orsted’s massive write-down on its US offshore wind farms and UK offshore wind auctions attracting zero bidders underscore the problem for green transformation technologies amid rising long-term bond yields and still elevated spot prices on industrial metals. Higher energy costs also make steel and concrete more expensive. As green transformation and renewable energy theme baskets have had a terrible year another zero-carbon electricity source such as nuclear power is having a field day.     Our nuclear power theme basket is the only basket with a positive return the past week and is now up 24% zooming in on semiconductors which is currently the best performing basket. With the fallout of wind turbines and the acknowledgement of the need for a clean and reliant baseload nuclear power is fast becoming a critical option for governments among developed countries to expand clean electricity. Another driving force has been the steadily higher uranium prices which are a function of a squeeze in the physical uranium market as industry players are scrambling to deal with a potential ban of Russian nuclear fuel which would severely constrain the industry’s access to fuel. The Uranium spot weekly price (Ux U308) has risen well above its 2022 high. Physical uranium is difficult to get access to as an ordinary investor. The only viable option is investing in uranium miners which naturally have direct exposure to the uranium spot price. The chart below shows the Sprott Uranium Miners UCITS ETF.   There are currently 60 nuclear power reactors under construction and the pipeline is steadily expanding with the majority of planned reactors still in Asia. Poland announced back in July another new nuclear power plant extending the country’s plans for nuclear power to takeover from coal power plants. In addition to new nuclear power plants, many upgrades are being done on existing power plants to expand capacity. In 2021, there were 440 operating nuclear power plants producing roughly 10% of the world’s electricity. As mentioned in one of recent equity notes, Sam Altman, the co-founder of OpenAI, is planning to IPO a small modular nuclear reactor company called Oklo in a sign that investor appetite has risen dramatically for this energy source. Most of the companies in our nuclear power theme basket are either utilities with a lot of exposure to nuclear power production or uranium miners. Cameco is one of the world’s largest uranium miners and providers of nuclear power fuel for reactors and has recently acquired (deal is not completed) a 49% stake in Westinghouse Electric in order to divest away from the volatile market in uranium. Westinghouse Electric is one for the world’s largest suppliers of technology to nuclear power plants and thus the move by Cameco will create the most vertically integrated company in the nuclear power industry.   Bubble stocks have the highest beta and highest sensitivity to cost of capital On the flipside of the strong performance in nuclear power stocks and commodity related stock we find bubble stocks. These companies have high equity valuations and still not profitable which naturally make them more sensitive to higher cost of capital. In addition, these stocks have a very high downside beta of 2 or more, which means that they more twice as much or more when the general equity market declines. If US longer end bond yields continue higher then this group of stocks are extremely vulnerable. Another potential risk is the ending of the hype cycle around generative AI which has helped inflate equity valuations in bubble stocks.    

SEK: Riksbank propping krona ? The Swedish krona has been a big outlier since the start of the week, strengthening for two consecutive sessions while all other G10 currencies fell against the dollar. While the positive developments on the SBB saga have likely helped compress the EUR/SEK risk premium, that seems insufficient to justify such outperformance, especially considering the krona’s high beta to risk sentiment, which has been soft. It appears instead that the Riksbank’s start of hedging operations is having a substantial impact on the market. For context, the Riksbank announced last Thursday that it would hedge part (USD 8 billion and EUR 2 billion) of its FX reserves in a risk-management move aimed at reducing losses in the event of a krona appreciation. Unlike other measures of this kind, the Bank did not release a schedule for purchases but only said that the operations would take four to six months, the sales “will be adjusted to market conditions to avoid counteracting the Riksbank's objectives” and weekly sales data will be published with a two-week delay. We saw two sharp drops in USD/SEK and EUR/SEK in the past two sessions shortly after 1000 BST in Monday’s and Tuesday’s session. We’ll be on the lookout today for a similar move around that time today, as that may be a signal that the Riksbank is conducting its daily sales operations around that morning timeslot. The Riksbank stressed this is not FX intervention or a monetary policy tool but mere risk management. The lack of transparency around the amount of weekly sales means the Bank can sell larger amounts at higher USD/SEK and EUR/SEK levels and then justify this as a mere loss-minimisation approach (buying more SEK when it is cheaper). For now, it seems like the wanted or unwanted beneficiary effect on SEK is working. We still point at some upside risks in the near term for USD/SEK and EUR/SEK, especially once markets adjust to the Riksbank being present in the FX market, although now there is definitely value in holding SEK against other high beta pro-cyclical currencies like NOK.

Rates Spark: No let up for now There is no let up in the upward pressure on rates. While risk sentiment is deteriorating further, we saw inflation swaps coming off their elevated levels as well. Are we finally getting the medicine that was needed? Bund asset swaps remained calm despite wider sovereign spreads and a lower collateral supply outlook.   Rates pressure remains, but risk sentiment is souring Following their rise at the start of the week, yields tested lower yesterday. But that rally proved short-lived, with the 10Y Bund yield ending the session above 2.8% again. What remained of the day was a sense of risk-off again. Equities ending in the red and European sovereign spreads noticeably wider even when yield levels briefly dipped. The key spread of 10Y Italian bonds over the German Bund is now above 190bp, solidly back into the range that prevailed ahead of the summer. But the widening was not confined to Italy. We saw a widening in Greek and other periphery country spreads, though not quite as pronounced. Perhaps it is the medicine that is needed. Real rates are on the rise again with the 5Y real ESTR OIS marching towards 0.6% – a level it had topped only briefly in July during this tightening cycle. Inflation swaps are coming off their highs, with the 5y5y inflation forward down another 2bp after Monday. Perhaps more surprising against the backdrop of souring risk sentiment was the fact that Bund asset swap spreads (ASW) were little changed – typically, they are sensitive to risk-off.  And even more notable as the German debt agency yesterday cut back the issuance targets for the fourth quarter by more than anticipated. Bond sales for the quarter were cut by €8 billion and Bubill sales by €23 billion. There was only a very short-lived widening in the Bund ASWs on the lowered collateral supply prospects, but we have to acknowledge that the current conditions in markets for high-quality collateral appear rather benign judged by Bubills trading relatively inexpensive versus swaps. And going from a current Bubill outstanding stock of €155 billion to €148 billion by the end of the year as now pencilled into the new funding calendar is not a dramatic shift to prevailing conditions, even if the original plan was to bring the stock to €171 billion. In terms of more direct impact, we also still have to wait for October when the Bundesbank ends remuneration of government deposits, which by the latest reading were around €38 billion at the end of last week. This could then still push into the collateral market. Note though that the debt agency itself has said its balances have already been shifted into the secured money market and are now close to zero.   Real rates are in the driving seat     Today's events and market view Yesterday’s short-lived test lower shows that upward pressure on rates is maintained. For now, the calendars have held little to really change the picture, and the same may hold for today. Only the US durable goods orders are of note today. The eurozone will release money supply data. Government bond primary markets will stay busier with a 10Y Bund tap out of Germany, a 50Y gilt reopening in the UK and later, a new 5Y note from the US Treasury alongside a 2Y floating rate note tap.  

The uranium spot price is continuing higher due to supply concerns and improving demand outlook for nuclear power plants driven by construction pipeline in Asia. Our nuclear power theme basket is getting closer to overtake semiconductors as the best performing theme basket in 2023. On the flip side, our bubble stocks basket is under pressure from rising US bond yields and waning risk sentiment in AI-related stocks. Key points in this equity note: Offshore wind and green transformation technology have had a bad year due to rising bond yields and high energy costs making steel and concrete expensive leading to waning appetite from investors. Nuclear power is getting closer to overtake semiconductors as the best performing theme in 2023 as governments are realizing that nuclear power is critical to achieve zero-carbon emission goals. Bubble stocks are under pressure from higher US bond yields and risk sentiment in generative AI stocks declining. Nuclear theme is steadily advancing as best theme in 2023 This year has been a catastrophe for wind turbine manufacturers such as Siemens Energy and Vestas. On the development side, Orsted’s massive write-down on its US offshore wind farms and UK offshore wind auctions attracting zero bidders underscore the problem for green transformation technologies amid rising long-term bond yields and still elevated spot prices on industrial metals. Higher energy costs also make steel and concrete more expensive. As green transformation and renewable energy theme baskets have had a terrible year another zero-carbon electricity source such as nuclear power is having a field day.     Our nuclear power theme basket is the only basket with a positive return the past week and is now up 24% zooming in on semiconductors which is currently the best performing basket. With the fallout of wind turbines and the acknowledgement of the need for a clean and reliant baseload nuclear power is fast becoming a critical option for governments among developed countries to expand clean electricity. Another driving force has been the steadily higher uranium prices which are a function of a squeeze in the physical uranium market as industry players are scrambling to deal with a potential ban of Russian nuclear fuel which would severely constrain the industry’s access to fuel. The Uranium spot weekly price (Ux U308) has risen well above its 2022 high. Physical uranium is difficult to get access to as an ordinary investor. The only viable option is investing in uranium miners which naturally have direct exposure to the uranium spot price. The chart below shows the Sprott Uranium Miners UCITS ETF.     There are currently 60 nuclear power reactors under construction and the pipeline is steadily expanding with the majority of planned reactors still in Asia. Poland announced back in July another new nuclear power plant extending the country’s plans for nuclear power to takeover from coal power plants. In addition to new nuclear power plants, many upgrades are being done on existing power plants to expand capacity. In 2021, there were 440 operating nuclear power plants producing roughly 10% of the world’s electricity. As mentioned in one of recent equity notes, Sam Altman, the co-founder of OpenAI, is planning to IPO a small modular nuclear reactor company called Oklo in a sign that investor appetite has risen dramatically for this energy source. Most of the companies in our nuclear power theme basket are either utilities with a lot of exposure to nuclear power production or uranium miners. Cameco is one of the world’s largest uranium miners and providers of nuclear power fuel for reactors and has recently acquired (deal is not completed) a 49% stake in Westinghouse Electric in order to divest away from the volatile market in uranium. Westinghouse Electric is one for the world’s largest suppliers of technology to nuclear power plants and thus the move by Cameco will create the most vertically integrated company in the nuclear power industry.     Bubble stocks have the highest beta and highest sensitivity to cost of capital On the flipside of the strong performance in nuclear power stocks and commodity related stock we find bubble stocks. These companies have high equity valuations and still not profitable which naturally make them more sensitive to higher cost of capital. In addition, these stocks have a very high downside beta of 2 or more, which means that they more twice as much or more when the general equity market declines. If US longer end bond yields continue higher then this group of stocks are extremely vulnerable. Another potential risk is the ending of the hype cycle around generative AI which has helped inflate equity valuations in bubble stocks.  

December’s ECB cheat sheet: A reality check for ultra-dovish expectations The ECB will almost surely keep rates on hold at the December meeting. The question is to what extent it will align with the market's aggressive pricing for rate cuts in 2024. We suspect it will fall short of endorsing ultra-dovish expectations. There is some upside room for EUR rates and the battered euro.       Heading into the European Central Bank's December meeting, there is growing evidence that the Governing Council is split about the messaging being presented to markets. The generally arch-hawk Isabel Schnabel dropped strong dovish hints by ruling out rate hikes this week, and markets are now pricing in 135bp of cuts in the next 12 months. We see a good chance that the overall message at this meeting will fall short of endorsing aggressive rate cut expectations. Above are the market implications in various scenarios. Our full ECB preview can be found here. A still-cautious ECB may not validate aggressive front end pricing A reassessment of inflation expectations has been in the lead in driving rates lower and raising the expectations of first rate cuts at the end of the first quarter next year. From next summer onwards, market indications point to anticipated headline inflation fixes below 2%. Indeed, the 2Y inflation swap has dropped to 1.8%. It is easy to overlook that at the same time, core inflation is currently still running at an elevated 3.6% year-on-year, giving the ECB enough reason to remain cautious. However, the pushback against aggressive market pricing has been half-hearted at best, with officials’ remarks having put cuts in the first half of next year clearly into the realm of possibility. But whether they're likely is a different question. The ECB may well decide to let the data be the judge – but at the same time, it remains more reluctant to extrapolate to the extent that the market does. Its own inflation forecast may come down next week, but potentially not to the degree that markets are discounting. We see a good chance that the rally in front end rates – which currently discounts a 75% probability of a cut next March – stalls, if not unwinds to some extent. The longer end may see less upward pressure, though. In the extreme, the Governing Council coming across as overly hawkish and brushing off the faster disinflationary momentum could push markets into the belief that a policy mistake is in the making.   ECB rate expectations   Lagarde can throw a lifeline to the unloved euroThe idiosyncratic decline of the euro has been one of the key themes in FX lately, with the common currency being the worst-performing currency so far in G10. The aggressive dovish repricing of ECB rate expectations has been the main driver, and the comments by Isabel Schnabel right before the pre-meeting quiet period have fuelled the bearish narrative further. With 125bp of cuts priced in by October and markets actively considering a start to the easing cycle already in March, it's difficult to see a bigger dovish repricing happening at this stage. That would suggest the euro does not have to fall much further from the current levels. Still, if only short-term rate differentials are taken into account, a decline to the 1.06 area in EUR/USD would not be an aberration. What is already halting the euro slump is the upbeat risk sentiment, which favours pro-cyclical currencies like the euro and caps the upside for the safe-haven dollar. We expect the ECB to continue its transition to a dovish narrative, but that will – in our view – happen at a slower pace than what markets are implying. We see tangible risks that the the central bank will push back against aggressive dovish speculations at this meeting, and the market may be forced to unwind some of those rate cuts bets, offering room for a EUR/USD rebound. That said, a EUR/USD recovery would struggle to extend much longer after the meeting due to the short-term EUR-USD swap spreads still pointing to a lower exchange rate.

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

FX Daily: Waiting on central bankers to shake data-resistant markets Investors have cemented Fed easing expectations despite some hotter-than-expected US data. We suspect a market reluctant to price out rate cuts will need strong words from the Fed – perhaps Powell himself – to reconnect rate expectations with data. Meanwhile, USD may stay rangebound. This week, Lagarde will speak in Davos, and UK CPI should slow further.   USD: Rate expectations still disjointed from data The first half of January has shown a dislocation between rate expectations and data in the US. The two most important data points for the Federal Reserve, labour and CPI inflation figures, both came in hotter than expected. PPI was a bit softer than consensus on Friday, but that is not enough to justify markets’ reluctance to price out Fed easing. The Fed funds future curve prices in 21bp of cuts in March, and 168bp by year-end. Our view remains that the Fed won’t start cutting before May, and that the total easing package will be 150bp. Accordingly, the rally in short-term USD rates appears overdone, and weakness in the front part of the USD curve should support some recovery in the dollar. However, we suspect that the data may prove insufficient to trigger a USD rebound for now; the consensus view of a dollar decline later this year seems to be making investors keen to sell dollar rallies. Also, the Fed probably needs to send a clearer message that the latest data does not justify the kind of aggressively dovish view embedded in money market pricing. There are a few more Fed speakers lined up this week, but perhaps dollar bears will want to hear it from Fed Chief Jerome Powell, who is not scheduled to speak until the 31 January FOMC announcement. Incidentally, the US data calendar isn’t very busy this week. Retail sales and the University of Michigan inflation expectations will attract the most attention along with jobless claims - which came in well below expectations last week, reinforcing the narrative of a still-tight labour market. We think the dollar will be driven more by other events than data this week, barring major surprises. First, the results of the election in Taiwan have raised again the delicate question of Taipei-Beijing relationships, with tensions among the two seen as a major risk for Asian and global risk sentiment this year. The dollar might benefit from some outflows from exposed EM FX. The situation in the Gulf also looks rather volatile after the US and UK military operations last week, even though the impact on oil prices has been muted so far.   Domestically, we’ll monitor the market reaction to the business tax relief extension currently being discussed in the US Congress. The impact of fiscal support may turn out to be negative for risk sentiment – and positive for the dollar – as markets see a greater risk of sticky inflation and a lower chance of Fed rate cuts. We think the dollar is more at risk of a rebound than a further correction from these levels, although the chances of another rangebound trading week in FX (DXY still hovering in the 102/103 region) are high.

Bank of Canada preview: Too early for a radical pivot Core inflation came in hotter than expected in December which rules out the Bank of Canada shifting meaningfully in a dovish direction at the January meeting. However, higher interest rates are biting and we continue to look for rate cuts from the second quarter onwards. US-dependent BoC rate expectations and the Canadian dollar may not move much for now.   Hot inflation warrants caution before dovish turn The Bank of Canada is widely expected to leave the target for the overnight rate at 5% when it meets next week. Policymakers continue to talk of their willingness to “raise the policy rate further if needed”, and inflation does indeed continue to run hotter than the BoC would like, but we see little prospect of any additional policy tightening from here. Instead, the next move is expected to be an interest rate cut, most probably at the April meeting. The latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”. Job growth does appear to be cooling and the Canadian economy contracted in the third quarter and is expected to post sub 1% growth for the fourth quarter. Also remember that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop, we expect Canadian headline inflation to slow to 2.7% in the first quarter and get down to 2% in the second versus the consensus forecast of 2.6%. As such, we see scope for the BoC to cut rates by 25bp at every meeting from April onwards – 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing.   Rate expectations in US and Canada   Fighting market doves is still hard Markets currently price in 95/100bp of easing by the Bank of Canada this year. As shown in the chart above, the pricing for rate cuts in the US and Canada has followed a very similar path. The implied timing for the first rate cut is also comparable: May for the Fed (March is 50% priced in), June for the BoC (April is 45% priced in). That is despite the communication by the Federal Reserve which has already pivoted (via Dot Plots) to the easing discussion while the BoC officially still retains a tightening bias. In practice, even if the BoC chooses – as we suspect – to delay a radical dovish pivot and stay a bit more hawkish than the Fed, pricing for the BoC will not diverge too much from that of the Fed. So, the room for a rebound in CAD short-term rates appears more tied to USD rates than BoC communication.     FX: USD/CAD to stabilise In FX, the story isn’t much different. The Canadian dollar has been a de-facto proxy for US-related sentiment, acting less and less as a traditional commodity currency – that would normally be hit by strong US data – thus outperforming the rest of high-beta G10 FX since the start of the year. The rebound in USD/CAD to 1.35 is in line with a restrengthening of the USD primarily due to risk sentiment, positioning and seasonal factors, rather than a divergence in Fed-BoC policy patterns. In fact, the USD-CAD two-year swap rate gap has widened further in favour of CAD so far in January, from 20bp to 32bp.   We expect the impact on CAD from this BoC policy meeting to be modestly positive as expectations of a radical dovish shift are scaled back. However, Governor Tiff Macklem already introduced the idea of rate cuts in a speech this month and will need to acknowledge the downward path for the policy rate to a certain extent. While waiting for the Fed meeting a week later and the crucial US CPI numbers for January, US-dependent rate expectations in Canada may not move much. USD/CAD may trace back to 1.34, but we don’t see much further downside for the pair this quarter as USD shows the last bits of strength.