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Twitter: [EUR] [EZ]

  • Strategy:

    • EUR: ​

      • 21 May-18: Trade idea - Strategic short EUR-USD: We re-engage in this trade, targeting 1.15 by the 14 June ECB MPC, possibly 1.125 by the 26 July ECB MPC. No-faster growth momentum as well as uncertainty around Italian government and EU-US trade relations are likely to conspire for a delay in the ECB's exit to September (and only if data rebounds by then - not a sure thing).

        • According to CFTC data, leveraged funds turned net short only in the week ending 15 May, while real-money positioning remains near-record long.

      • Post-Italian election impact on ECB (5 Mar-18): Unclear Italian elections outcome may temper any hawkish confidence at this week's ECB meeting(Thu, 845pm). Despite continued calls from hawkish members of the Governing Council for an end to QE, the recent round of weak inflation data suggests ECB guidance is likely to stay unchanged and that a pledge to reduce asset purchases may not happen until later in Q2. During the press conference, Draghi is likely to emphasize the bank's persistence in providing monetary accommodation as well as field questions about euro volatility. We also watch for any indirect communication implied by any ECB economic forecast revisions.​

  • Macro:

    • 21 May-18: Eurozone - ECB may soon appreciate 'dolce far niente': Our focus this week are Euro-area PMIs (Wed), ECB Minutes (Thu) and - once again - Italian politics.

      • Slower momentum is persisting into Q2: An extended deceleration in PMIs in May would confirm slower momentum beyond the soft patch in Q1. Lower composite PMIs in April already suggest that Eurozone growth likely slowed further from 0.4% qoq in Q1 - shaving off an estimated -0.2ppts.

      • ECB minutes - Softer conviction?: We watch for any signs of reduced conviction around European growth and/or a wait-and-see approach - possibly reflecting uncertainty around Italy and global trade (in particular US-EU trade talks since the unilateral US exit from the Iran accord).

        • Earlier this month, ECB Chief Economist Praet said that despite the recent slowdown there's "no evidence" that demand is softening. "Recent information remains consistent with solid and broad-based expansion". Any softening of this stance - when Praet speaks at the IIF spring meeting (Thu) - would be informative.

    • Inflation is holding back EU (5 Mar-18): EU inflation prints last week drifted further away from the ECB's 2% target - with core and headline CPI at 1.0% and 1.2% yoy​

  • Growth:

    • Commentary: 

      • FT (16 Apr-18): ​Up to now, there has been no compelling fundamental narrative that would account for the eurozone slowdown. But there are two possible candidates.

        • The first is that the effects of the ECBs belated shift to quantitative easing in January 2015 have now started to wane. Although this policy change did not involve a large drop in real policy rates, it did succeed in reducing bank lending rates and bond yields throughout the eurozone, and also restored the provision of bank credit in the troubled economies. It is conceivable that this impetus moved past its maximum effect on the growth rate in 2017. Fulcrum economists estimate that the monetary impetus was adding about 1 percentage point to eurozone activity growth in mid 2017, and this has now entirely disappeared. Furthermore, forward short rates in the eurozone began to rise last year as the markets anticipated future ECB normalisation of monetary policy. 

        • A second possible explanation is that the growth rate during 2017 was simply too far above the long run growth rate for this situation to be sustainable indefinitely. Supply constraints may have started to bite. The Fulcrum nowcast models had anticipated a gradual return to trend occurring in 2018, and they now seem to interpret the data as being consistent with a much sharper return to trend than was previously expected

    • EU growth projections (9 Nov-17): Despite the growth forecast upgrades, the EU said it still faces labor, wage and inflationary pressures that are compounded by risks posed by the U.K.’s exit from the bloc and US protectionist economic policies. The threats were evident in the bloc’s forecasts for 2018 and 2019, when economic growth is expected to slow down. The eurozone is seen expanding to 2.1% in 2018—still up from a previous expectation of 1.8%—with the growth rate dipping to 1.9% in 2019, when Britain will leave the EU.

  • Monetary policy (updated 25 Jan-18): 

    • ECB policy: 

      • 25 Jan-18 MPC - observations:

        • Draghi makes forward guidance somewhat more explicit: he sees very little chance of a rate hike this year. This is probably the most dovish remark of the day.

        • Draghi notes that some FX appreciation because of an improving economy is a "fact of nature." He makes a passing reference to Mnuchin's comments and multilateral agreements on FX targeting/devaluations, but stops short of calling him out directly.

        • So what is the whole issue with forward guidance? In a nutshell: the Governing Council wants to continue buying bonds until it sees a sustained pickup in inflation. But as QE nears its end, and there are fewer and fewer bonds to buy for the ECB, the key issue is whether to sever the link between inflation and bond-buying. This way, policy makers would have a free hand to stop QE even if prices aren't exactly on target. That would be, in short, a hawkish signal. Therefore, Draghi's prudence in even getting this conversation started.​

    • People (incomplete): ​

      • President Mario Draghi​

      • Vice President Vitor Constancio

      • Executive Board member Benoit Coeure

      • Executive Board member Sabine Lautenschlaeger

      • Executive Board member Yves Mersch

      • Executive Board member Peter Praet: Chief Economist

      • Governing Council: Carlos Costa (Portugal), François Villeroy de Galhau (France), Chrystalla Georghadji (Cyprus), Ardo Hansson (Estonia), Boštjan Jazbec (Slovenia), Klaas Knot (Netherlands), Philip Lane (Ireland), Erkki Liikanen (Finland), Luis María Linde (Spain), Jozef Makúch (Slovakia), Ewald Nowotny (Austria), Gaston Reinesch (Luxembourg), Ilmārs Rimšēvičs (Latvia), Jan Smets (Belgium), Yannis Stournaras (Greece), Vitas Vasiliauskas (Lithuania), Mario Vella (Malta), Ignazio Visco (Italy), Jens Weidmann (Germany)

      • Supervisory board

        • Chair Daniele Nouy

        • Vice Chair Sabine Lautenschläger




Updated 18 Jan-18

Twitter: [Germany]

  • Macro:

    • Week ahead (12 Mar-18): Elsewhere in EU politics this week, Germany's Angela Merkel formally signs the coalition pact with the SPD, which opens the way for a parliament vote and her inauguration on Wednesday. 

    • Week ahead (5 Mar-18): It was confirmed yesterday that a majority of German SPD members (66%) voted to approve the grand coalition pact with Chancellor Merkel's CDU-led bloc. Merkel is expected to be inaugurated in mid-March and the SPD - which will control the finance minister post - says it will provide its cabinet nominations on March 12. The new German grand coalition opens the way for a small fiscal stimulus in coming years while preserving a budget surplus. The coalition has also signaled a slow and cautious push towards greater European integration, including the potential for economic and tax harmonization with Macron's France.​

  • Domestic politics

    • German Chancellor Angela Merkel is engaged in 'grand coalition' talks between her Christian Democratic-led bloc and the Social Democrats. The previously attempted 'Jamaica coalition' talks with the Free Democrats and Greens - that failed in late Nov-17 - revolved around strong differences around key issues: risk-sharing within the euro area, cutting carbon emissions/curbing coal use, and immigration.

    • Reference:

      • Parties:

        • CDU-CSU Bloc: Led by Chancellor Angela Merkel

        • Social Democrats (SPD): Led by Martin Schulz

        • Green Party

        • Free Democrats

        • Alternative for Deutschland (AfD)

      • President Frank-Walter Steinmeier



Updated 7 Nov-17

[Twitter: EMgist latest]




Twitter: [Italy]

  • Strategy:

    • Equities: ​

      • 21 May-18: Conditional trade idea - Short Italian stocks vs Stoxx 600 (if Mattarella does not plead for a re-write of the Five Star-Lega joint policy platform): We consider President Mattarella as the last bulwark for an EU/market-friendly public policy. As such, his potential approval of the coalition joint document is likely to extend losses for Italian stocks. On the other hand, an outright rejection would raise the probabilities for fresh elections that are likely to see more gains from populist parties. The least-negative scenario is one where Mattarella navigates the process in such a way as to force a revision/softening of the Five Star-Lega joint policy platform.

      • 14 May-18: Conditional trade idea - Strategic short Italian stocks vs long Eurostoxx 600 or Spanish stocks (fade any initial bounce on new government announcement): It remains to be seen whether a prospective Five Star-Lega government was one built on good faith, with enough durability and credibility to pass an FY19 budget that is acceptable to Brussels.

        • Potential proposals being discussed are fiscal-negatives if not accompanied by higher tax rates/reduced spending elsewhere. Proposals include: Flat tax (as low as 15%; a previous Lega/centre-right proposal of 23% could cost est. ~40bn euros/year), repealing the previous pension reform and lowering the retirement age (est. cost ~15bn euros/yr) and guaranteed income for the poor (Five Star proposed 780 euros/mth at est. cost of 17-30bn euros/yr).

        • The relationship between Rome and Brussels could be further tested as Italy seeks European Commission approval for a 6mth-extension of a guarantee program for banks' bad loans that expires in September.

        • The risk to this trade is that the positive 'spin' (reduced likelihood of near-term fresh election) temporarily outweighs the fundamental 'negative' (heightened prospect of a populist fiscal agenda). See Italy Elections: Mamma Mia! High-Risk Scenarios Are Underpriced in BTPs, FTSE MIB (25 Feb-18).

      • Post-elections - Tactical short Italian stocks and bonds (BTP-Bund, FTSE-MIB vs Stoxx 600) on under-priced high-risk post-election scenarios (5 Mar-18): Among our key concerns include a larger-than-expected voter turnout for the populist and anti-establishment Five Star (M5S) or Lega Nord, which could set the stage for 'market-negative' scenarios: 1/ New elections, 2/ An M5S-led government with smaller leftist parties or even 3/ An anti-establishment alliance with Lega.​ Although party leaders Luigi Di Maio (M5S) and Matteo Salvini (Lega) ruled out an alliance during the campaign, this could change if official results show it is possible for the two parties to govern. We note however that the two parties - while anti-establishment, euro-skeptic and populist - are on opposite ends in terms of political orientation.

  • Macro: 

    • 21 May-18: Italian government - Five Star-Lega coalesce, all eyes on Mattarella: Five Star and Lega last week agreed form a coalition government, without agreeing on who would become prime minister, though a Florentine law professor Giuseppe Conte is reportedly a frontrunner. The joint manifesto - “Contract for a Government for Change” - will be voted on by party members over the weekend.

      • President Sergio Mattarella would still need to endorse Five Star/Lega's choice for premier as well as policy platform. However, a rejection by Mattarella would be controversial since a majority of Italians are in favour of a Five Star-Lega government and only a quarter would like to see a new election.

      • Among the policy highlights elaborated by the joint manifesto - “Contract for a Government for Change” - include:

        • EU economic governance: Review fiscal rules, revisit EU treaties and regulatory framework

        • Government debt: Debt-reduction not through austerity but pro-growth policies

        • Banks: Review of European 'bail-in' rules for the banking industry, with more protection for savers

        • Tax/income: Flat tax at 15% and 20%, future introduction of a 'citizens' income'

        • Pensions: Repeal of 2011 pension reforms that raised the retirement age

        • Foreign policy: Repeal sanctions on Russia

        • Immigration: 'compulsory and automatic resettling of asylum seekers among EU member states', review of Dublin Agreement

        • The document excludes: Debt write-off plans, euro exit procedures

    • 14 May-18: Italian government update: Populist eurosceptic parties - Five Star and Lega - are discussing a policy program as a crucial step towards joint government. Press reports suggest that one area of disagreement - namely who will hold the premiership - may be resolved and unlikely to be either of the two party leaders (Luigi Di Maio and Matteo Salvini). Both are expected to meet President Sergio Mattarella as soon as Monday, who would review the viability of the policy program as well as the compromise premier, who would need to win a vote of confidence in both the Lower House/Senate. If the Five Star-Lega tie-up succeeds, Italy would be the first large country within the Eurozone to be led by an anti-establishment/euro-sceptic government.​

    • Week ahead (12 Mar-18): In EU politics, we are watching Italy's PD leadership meeting on Monday, which could see Matteo Renzi replaced - and in turn change the state of play in Italian cross-party dynamics, which remain highly-fluid. This protracted period of uncertainty and party negotiation has caused us to push the investment horizon a few more weeks on our short BTP-Bund and short FTSE MIB-Eurostoxx recommendations (see Italy Elections: Mamma Mia! High-Risk Scenarios Are Underpriced in BTPs, FTSE MIB, 25 Feb-18). Moody's (Baa2, negative) and Fitch (BBB) review Italy's sovereign rating this Friday.​


  • Monetary policy

    • Banking system: Government measures on Monte Paschi and the two Veneto banks have defused a big source of financial and political stress in the euro zone for the last two years. But underlying problems remain, including cronyism with many lenders too entwined with politicians, unions and foundations of all shapes and sizes.

      • Election implications:

        • Bank reform: Further attempts at banking reform - for example, to help clear banks' balance sheets of NPL, or make more changes to local bankruptcy laws on defaulted borrower assets - will need a majority government. A populist coalition could stall reform. 5SM would like to see more radical long-term moves, including Glass-Steagall-inspired plans to break up the banks to separate commercial and investment-banking activities.​

        • Bail-In, Deposit-Insurance Revamp May Slow: EU proposals to help Italy's banks in the event of a crisis could stall in the event of a hung parliament. A new monetary fund (EMF) built out of the bloc's existing bail-out fund (ESM) would have wide powers, including acting as lender of last resort, under Dec. 6 proposals. Fund release would be based on majority voting, not unanimity, though the EMF would play a bigger compliance role. Ongoing plans to create a common deposit insurance plan (EDIS) would give retail depositors stronger, more uniform protection.

        • Italian Banks Are Exposed to Tougher NPL Deal: A coalition government would likely result in Italian banks getting a tougher deal in the upcoming round of asset-quality regulation. ECB and European Commission proposals envisage an acceleration of provisioning, with both exerting a negative effect on capital, yet the EC's ideas are more moderate. With the EC publishing formal proposals in March, Italian banks are in need of negotiation champions to minimize any effects. A coalition government may be more divided on banks, accepting a more punishing deal.

        • Relaxing Fiscal Austerity to Have Long-Term Implications: Electoral-campaign proposals increasing the government deficit would have the potential to affect Italian banks' profitability, given their large government-bond holdings. Any fiscal relaxation could raise the yield gap to German bonds. Changes in yields imply a higher cost of funding and reduced asset values, and would dent capital through AFS-reserve changes. Italian banks hold about 10% of their assets in sovereign bonds on average, much higher than Germany's 3.9% and France's 2.3% rates. Among the country's largest banks, Banco BPM has about 15% assets in sovereign bonds.

  • Fiscal policy and debt: 

    • Five Star-Lega platform: 

      • Views: ​

        • ​Analysts calculate that the proposed Five Star-Lega program may raise the annual budget deficit to EUR100bn (~5% of GDP), but Five Star contends that it would cost just EUR20-30bn (~1.7% of GDP) after tax breaks and 'wasteful spending' are cut:

    • During the election campaign, most parties are pledging popular but costly measures that may prove hard to implement amid high levels of public debt and slow economic growth. 

    • Italian government debt-to-GDP ratio was 132% in 2016 - the second-highest in the euro area after Greece. The secondary bond market ranks No. 4 globally. The European Commission called the debt “a major source of vulnerability” for Italy and has been overseeing the country’s efforts to reduce spending. 

  • Domestic politics - 4 March elections in focus

    • 4 March ​parliamentary elections: 2018 Italian general election is due to be held on 4 March 2018 after the Italian Parliament was dissolved by President Sergio Mattarella on 28 December 2017. Voters will elect the 630 members of the Chamber of Deputies and the 315 elective members of the Senate. Market concerns revolve around the likely prospect of a hung parliament, potentially larger-than-expected turnout for the Five Star Movement and the Northern League junior partner of Silvio Berlusconi's Forza Italia-led coalition. 

      • Latest:

        • 5 Mar-18: The Five Star Movement looks set to win around 230-240 seats in the lower house (out of a total 630) - short of the 316 needed for a majority, but enough to make it unignorable. 

          • The League is set to gain 115-123 seats in the lower house, more than its Center-Right coalition partner Forza Italia, which looks like getting around 99-105 seats - a blow for FI’s leader Silvio Berlusconi

          • The strong showing of Five-Star and the League may increase the chance of an anti-establishment alliance that would have enough seats to form a government, a possibility largely dismissed in the run up to the vote

          • The ruling Democratic Party is projected to win between 104-110 seats, a blow for party leader Matteo Renzi and current Prime Minister Paolo Gentiloni

          • The poor showing of the Democratic Party and Berlusconi’s Forza Italia, may also decrease the chance for some kind of Grand Coalition government that could overcome the electoral gridlock

          • Counting of votes continues and could be a long process​

      • Pre-election uncertainty prevails as anti-establishment voting intentions undercounted, high abstention rate expected and party allegiance to coalitions are fluid: Voting intentions for right-wing voters may be underestimated and 30-40% of voters are still undecided. A high abstention rate (possibly above 30%) could also add to unpredictability. Low participation rates in the Lombardy (38%) and Veneto (57%) regional elections in October 2017 favoured the Northern League - with a vast majority favouring greater autonomy (95% and 98%, respectively).

      • Potential outcomes: Polls published before the start of a blackout period on Feb. 17 suggested that Five Star was on course to become the single biggest party but would trail the Berlusconi centre-right coalition. After elections, much will depend on President Sergio Mattarella (of the DP party), whose role is to grant an exploratory mandate to the figure he believes could secure a majority. A senior state official reported (Bloomberg, 21 Feb-18) that Mattarella is unlikely to give Five Star's Luigi Di Maio a chance to govern unless he either wins a majority of seats or can forge a government with backing. Even if it wins the most seats, Five Star may be challenged to find allies, but a high-risk scenario of a tie-up with the Northern League (currently part of the Forza Italia-led centre-right coalition) should not be discounted.

        • #1. Hung parliament leads to caretaker government until coalition emerges or new elections (38% - 2-7 Feb, Bloomberg survey probability): If no group is able to form a governing coalition, PD's Gentiloni could stay on as caretaker until a working government emerges or until there are fresh elections. Electoral reform law passed last year encourages parties to build alliances rather than allow plurality winners to go at it alone because it allows parties to fight for seats as coalitions. 

          • New elections?: ​New elections may be put off until June 2019 if President Mattarella prioritizes: 1/ Passage of a state budget by end-2018 and 2/ Parties work out a new electoral law (possibly more 'first-past-the-post' seats).

        • #2. No majority win leads to 'Grand Coalition' (33% - 2-7 Feb, Bloomberg survey probability): If no coalition wins a majority of seats, parties may also form coalitions. One scenario - deemed most market-friendly - is a German-style “grand coalition” between the centre-left coalition (led by Democratic Party) and Berlusconi’s Forza Italia (plus smaller moderate allies). The first challenge is to obtain the necessary seats (the minimum required for a majority is 316 seats in the lower house). Next, negotiations are expected to be difficult and may be protracted - lasting several weeks. The challenge in this scenario is the uncertainty over who would lead such a coalition. Given Berlusconi's ban from running for office as well as centre-left divisions over re-appointing Renzi, it is likely that PM Gentiloni could serve again.

          • Forza Italia-Democratic Party: This is deemed the most market-friendly scenario (other than an unlikely centre-left government). However, this alliance could be unstable if Berlusconi wins his appeal on running for office. He could withdraw support for the coalition in a bid to return as prime minister​. Berlusconi was banned from serving for six years following a conviction on tax fraud, but is challenging the legality of that law in European courts.

        • #3. Centre-right coalition secures a majority (22% - 2-7 Feb, Bloomberg survey probability): This could be achieved with a centre-right majority from the outset (316 seats) or with the support of some MPs from other groups after some negotiations. The centre-right is seen as the best placed coalition to take advantage of the new electoral system - able to win many first-past-the-post seats as well as a large proportion of nationwide votes. Momentum also favours the centre-right. Finally, it is believed that many undecided voters - or those abstaining from polls - generally lean to the centre-right.

        • #4. Five Star government by majority win or coalition with other parties (8% - 2-7 Feb, Bloomberg survey probability): If the centre-right fails to win a majority, it is possible that the President could give the M5S the mandate to form a government. In turn, the M5S could form a government with either leftist parties or even with the Lega:

          • M5S-Leftist government: Given its leftist political leanings, the M5S could seek an alliance with the LeU party or by poaching members of the PD, which could tip it over the 316 seats.

          • M5S-Lega-FdI government: Alternatively, it is not impossible that 5SM could lure the Northern League and Brothers of Italy away from the Forza Italia-led centre-right coalition. One challenge to this scenario is that the majority of Five Star’s voters are left-leaning. However these parties generally share a Eurosceptic ideology.

      • People and parties: ​

        • Five Star Movement​: Eurosceptic, anti-establishment populist party. PM candidate Di Maio has ruled out forming a coalition with rival forces, saying that he would seek their support for Five Star reforms instead. Mainstream parties have rejected this.

          • Luigi Di Maio​: 31yr-old candidate for prime minister

          • Agenda: Simplify and digitalise administration and bureaucracy, €50 billion in public investment in innovation and technology, cut public spending, create a universal allowance for citizens, business tax cuts, carbon-free economy by 2050, abolish pension reforms that raised the retirement age, create judicial and education reforms.

        • Centre-right coalition: Comprised of four parties, led by Berlusconi's Forza Italia. Berlusconi needs to overcome two key potential troubles: 1/ Current lack of an official candidate for PM and 2/ Diverging policy with his coalition allies. Tensions with Matteo Salvini from the Northern League have so far failed to agree on an alternative candidate. The parties are also likely to disagree on a future government's approach in many policy areas. A Votewatch analysis shows that Forza Italia and Renzi's Democratic Party, who have also governed together in the past, would match up better than Forza Italia and the Northern League, who consistently vote differently in the European Parliament.

          • Forza Italia and Silvio Berlusconi​: Silvio Berlusconi is back. The controversial former prime minister boasts his name on the party symbol — but the media mogul is forbidden from running because of a 2013 tax fraud conviction. His clear and straightforward communication style is favoured among the elderly and voters in the south. Berlusconi has tried to rebrand himself as the man who can save Italy from populism. The party has yet to decide who will take the reins for Forza Italia should it form a government. Pollsters have Forza Italia at around 15%.

            • Agenda: Introduce a flat income tax rate of 23%, increase the minimum pension to  €1,000 a month, repeal the 2012 pension reform,  scrap inheritance and capital gains tax, no to EU austerity measures, stop migrants from arriving on Italian coasts, create a "Marshall Plan" for Africa to reduce sea arrivals, repatriate illegal migrants,  judicial reforms, eliminate temporary jobs,  and increase regional autonomy from the central government.​

          • Northern League (Lega Nord): Former secessionist party. Euroskeptic and right-wing, this controversial party is known in Italy simply as Lega, with its leader Matteo Salvini allied with Berlusconi’s Forza Italia. Over the past five years, Salvini has used anti-EU and anti-globalisation rhetoric as its supporters remain discontent with the economy and immigration. Salvini’s alliance with Berlusconi could prove difficult over the medium-term because of disagreements over key issues including Italy’s relationship with the EU. He boosted his party’s polling from 4.1% in 2013 to the current 13-14% with his persistent media presence and divisive social media posts.

            • Matteo Salvini​

            • Agenda: Repeal of the Democratic Party education reform,  prioritise education and research,  create "Green New Deal",  abolition of Renzi's Jobs Act by supporting permanent and full-time contracts, boost public spending, progressive tax distribution, universal welfare, and reduce military expenditure.

            • History: The League was born as a group campaigning for independence for the wealthy north from the rest of Italy, but under Salvini its focus has shifted to fighting immigration and the euro.

          • Brothers of Italy (Fratelli d’Italia): This is the only main party led by a woman, Roman politician Giorgia Meloni. Described as “a southern equivalent of the Northern League with neofascist roots,” by the Guardian, the right-wing party is allied with both Forza Italia and Lega — alongside moderates Noi per l’Italia, UDC. Brothers of Italy could get up to 5% of the total votes.

        • Democratic Party: Ruling centre-left. The center-left force is being led by former Prime Minister Matteo Renzi. Paolo Gentiloni, the current head of the government, is running in his Rome constituency. A few months ago, the Democratic Party, known as PD, suffered a hemorrhage of MPs as smaller groups disagreed with labour and pension reforms. These MPs split to form a party that veered further left called Liberi e Uguali (Free and Equal). Most likely, it will be the second-most voted single party after M5S. January polls have it at around 25%, but it’s losing support on the left for being too centrist on social issues and employment.

          • Prime Minister Paolo Gentiloni

          • Ex-PM Matteo Renzi​​

          • +Europa (More Europe): The liberal and pro-EU party is allied with the Democratic Party. Emma Bonino, a leading member of the Italian Radical Party and prominent activist for various civil rights battles, launched +Europa along with Christian-democratic economist Bruno Tabacci. The party’s electoral base is strong amongst well-educated youngsters, expats and left-wing supporters disillusioned by the internal struggle between PD and Liberi e Uguali. +Europa is polling just above 2-3%.

          • Agenda: Tax cuts to boost permanent contracts,  higher minimum wage, tax cuts for businesses,  reform welfare (€9 billion plan that includes a baby bonus scheme), fight tax evasion, give more funding to lower education, create a recruitment plan for universities,  pass a bill on citizenship for the children of migrants, a month of compulsory civilian service for the young,  police recruitment plan, more investments on culture, and work towards the United States of Europe

        • Free and Equal (Liberi e Uguali, 'LeU'): The party is spearheaded by former anti-mafia magistrate and Senate President Pietro Grasso, who is widely considered to put up an anti-Renzi fight. He's been criticised by many — including former Prime Minister Romano Prodi — for having destroyed the unity of the center-left, and leaving the country vulnerable to Berlusconi’s troops. Free and Equal’s main objective is to overhaul the current government's job reforms and replace it with a more leftist policy. It is polling at around 5-6%.

        • President Sergio Mattarella: Mattarella's task is to appoint a premier that is able to win a parliamentary majority. The head of state could pick a politician or a technocrat as long as that figure was able to command the support of the legislature.

      • Electoral system - favours coalitions but won't guarantee stability: A new electoral law called Rosatellum, named after Ettore Rosato, the Democratic Party MP who pushed it forward, makes it hard for parties to win alone — putting a premium on coalitions and pitting candidates against each other at a local level.

        • Under the Rosatellum electoral system, 37% of the parliament is elected locally, with the seat going to the candidate with the most votes in his or her constituency. The remaining 63% of seats are allocated proportionally via the use of short closed lists, with a small number selected by Italians living abroad. This new system will force parties to compete in closely contested races constituency by constituency, investing heavily in dozens of micro-campaigns all over the country. Tiny formations have to clear a 3% threshold to get into Parliament.

        • With no proper electoral premium for the winner, the new Italian electoral law has favored the formation of large coalitions but won't guarantee a stable government. The rule envisages a third of seats being assigned on a first-past-the-post basis and then linked to the remaining two-thirds which will be assigned on a proportional basis. That may have delivered a clear majority in a two-party system, but not in Italy's fragmented party scenario, where Five-Star and Berlusconi's and Renzi's coalitions all score above 25% but don't reach 40%.

      • 'Italexit' risks have softened: All major Italian parties have called euro-zone-membership into question, but many are softening their stance. A referendum could come with an anti-establishment Five Star or right-wing Northern League coalition if EU concessions aren't won - essentially, looser fiscal rules - though this would be hard constitutionally. Both Five Star and Northern League have softened their opposition to the euro. Pulling Italy out would require cross-party political backing through a strenuous legislative process, and a constitutional amendment before any referendum could be held. No party has made this process central to its agenda.

  • Foreign relations

    • Italy-EU relations: Although calls for euro exit and referendums are absent from all party platforms​, anti-European rhetoric still features in manifestos. Most anti-EU views are expressed via the following flash points:

      • Anti-austerity​: Higher pension benefits and unfunded tax cuts are the most popular campaign pledges. Repealing the 2012 pension reform could increase annual govt spending by EUR 20bn (1.2% of GDP) according to Italian Treasury estimates. The proposed flat tax (23% for Forza Italia, 15% for Lega) creates significant fiscal shortfall. 

      • Immigration

      • The likely result is that regardless of which government is ultimately in power, relations between Rome and Brussels could become more confrontational in coming years.


Twitter: [Spain]


  • Strategy: ​​​

    • Equity - Tactically long IBEX mostly based on improved valuations post-Catalan crisis (13 Nov-17): Take profit if/as polling data ​suggest secessionists are gaining ground. Spain Ibex is our preferred Eurozone index (with CAC 40)

  • Macro: 

    • Week ahead (12 Mar-18): Spain's Catalan parliament meets to elect a regional leader after exiled former president Carles Puigdemont withdrew his candidacy in favour of jailed separatist leader Jordi Sanchez, who was denied a petition to leave jail to attend the session.​

  • Growth: 

    • EU raised its 2017 Spanish GDP growth forecast to 3.1% from 2.8% (10 Nov-17) while bumping its outlook for next year to 2.5% from 2.4% previously. The Spanish economy is seen expanding by 2.1% in 2019​.

      • Catalonia implications: Economy Minister Luis de Guindos has warned (6 Nov-17) that the Catalonia dispute has cut Spain's 2018 GDP outlook by 0.4ppts to 2.3% from 2.7%, while PM Rajoy says it could be raised to 2.8-3% if Catalonia returns to normality after 21 Dec-17 elections. Close to 2,400 Catalonia-based firms - including Caixa Bank and Banco Sabadell - have announced an intention to leave the region in the six weeks after 2 Oct due to political uncertainty.

  • Domestic politics

    • New elections and Rajoy no-confidence?:

      • Commentary: ​

        • 28 May-18 (Bberg): Recent opinion polls, which showed that many opposition parties stood little to gain in a fresh election, could deter opposition parties from throwing out the current government. Ciudadanos is projected as the only party that would increase its seat count in a big way, but that party would still be well short of achieving a majority of 176 required to form a government on its own.

          • The PP would win about 85 seats down from 134 seats currently if an early vote was held, according to the website Electomania. Ciudadanos would boost its number of seats almost threefold to 93 while the Socialists would fall to third place with 83 seats, one less than now.

          • The prospect of new elections also looks like bad news for nationalist and separatist parties in Catalonia and the Basque Country that fear the advance of Ciudadanos could erode their support in parliament and their ability to extract concessions in return for their votes.​

    • Catalonia:​​

      • Commentary: 

        • FT (21 May-18): Catalonia’s new leader Quim Torra must form a government to avert more elections and end a seven-month stand-off that has rocked Spain. Mr Torra, a hardline nationalist chosen by the region’s deposed president, Carles Puigdemont, was elected by 66 votes to 65 last Monday and sworn in as president of Catalonia in Barcelona on Thursday. His appointment helps ease uncertainty in the region, which represents one-fifth of Spain’s economy. New elections would have been called if the Catalan parliament had not agreed on a viable candidate to lead the region. Madrid has said it will end direct rule over Catalonia once a regional government is formed but it remains unclear how it will respond to Mr Torra’s pledge to pursue Catalan independence.​

      • Reference:

        • Parties: ​

          • Esquerra Republicana (ERC, 'Catalan Republican Left'): Pro-independence. Led by ex-VP Oriol Junqueras, who remains in jail while being investigated for rebellion (as ruled by the Supreme Court on 5 Dec-17). ERC General Secretary Marta Rovira.

          • PDC (PDeCat, 'Catalan European Democratic', 'JxCat'): Pro-independence. Ex-Pres. Puigdemont's party.

          • CUP: Pro-independence. Led by Anna Gabriel

          • Catalunya en Comu-Podem: Electoral alliance formed by Catalunya en Comú and Podemos' Catalonia faction, Podem. This party may determine whether the separatist bloc gets another chance to govern. Catalunya en Comu is alone in the center ground, neither strongly for or against a break away from the rest of Spain. Instead, 43-year-old leader Xavier Domenech is calling on Spain to allow Catalans a vote on the issue, with opinion among his party colleagues divided on which side they should back if such a vote were to be held.

            • About three out four voters are in favor of a referendum endorsed by the Spanish state​ (Bloomberg, 5 Dec-17).

          • Ciutadans (Cs): Largest pro-Spain party in Catalonia. Led by Ines Arrimadas. Nationally known nationally as Ciudadanos (4th-largest) and led by Albert Rivera.

          • PSC: Pro-Spain. Led by Miquel Iceta, who in 2016 supported the idea of a legal referendum if a reform of the Spanish constitution fails to satisfy the electorate.​

          • People's Party (PP): Pro-Spain. Party of PM Rajoy.

          • CSQP: Pro-Spain

    • Reference: ​

      • People: ​

        • PM Mariano Rajoy​

        • Albert Rivera: Ciudadanos party leader

        • Ex-Catalan President Carles Puigdemont



Twitter: [Greece]

  • Fiscal policy and debt:​

    • An analysis of the sustainability of Greece’s debt, drawn up by theEuropean Commission ahead of a Jan. 19 call of euro-area finance ministry deputies and obtained by Bloomberg, foresees a worse trajectory for the country’s debt than what was expected a few months ago. According to the European Commission’s baseline scenario, Greece’s debt-to-GDP ratio is expected to reach 181.1 % in 2017, 165 % in 2020, 127.2 % in 2030 and 96.4 % in 2060, forecasts that are slightly higher than what was projected at the end of the last review in June.


Updated 27 Nov-17

Twitter: [EMgist Ireland]

  • Domestic politics:​

    • Latest

      • 27 Nov: Ireland's minority government scrambled to avoid an election. Deputy PM Frances Fitzgerald faces a no-confidence motion Tuesday over her handling of a whistleblower controversy that could trigger a national vote. PM Leo Varadkar and opposition leader Michael Martin are close to a deal on the matter, the Sunday Times reported.​

    • Ref:

      • People: ​

        • PM Leo Varadkar

        • Deputy PM Frances Fitzgerald​

        • Michael Martin: Opposition leader



Twitter: [UK latest] [Brexit latest]

  • Strategy:

    • GBP:

      • Tactically short bias (14 Nov-17): Prefer to play GBP tactically around Brexit-related catalysts, PM May/Tory party developments and ​possible downside risks from economic data. BOE's 'dovish hike' (2 Nov-17) indicated that it's not embarking on a tightening trend. This suggests simultaneously that: 1/ The bar is set high for economic data to disprove BOE's dovish stance and 2/ Downside surprises (in economic data) could have an asymmetrically negative impact on GBP (would reinforce 'policy mistake' belief). However, the GBP is undervalued on a REER basis, which reduces the case to be strategically bearish.

  • Macro:

    • 14 May-18: GBP = Going Bi-Polar: Last week, BOE Governor Carney tried to maintain the optionality to hike later in the year, but investors were not convinced. Despite BOE forecasts showing inflation will slow faster than expected and 2018 GDP outlook lowered, Carney maintained that a hike is "likely by end of the year". GBP OIS rates now show 50-50 chance of a hike in September (down from 60% prior to the BOE meeting).

      • In Brexit news, EU's chief negotiator Barnier briefs European affairs ministers on the status of negotiations (Mon), while PM May meets with her Brexit cabinet (Tue).

    • Week ahead (5 Mar-18): In the UK, Prime Minister May's speech last Friday indicated a softer Brexit, which may appease proponents for a customs union but alienate hardline Brexiters within the Tory party. Practical questions remain - particularly on the Irish border. The EU's chief Brexit negotiator Barnier welcomed the speech for its 'clarity'. Talks enter a critical phase this week as EU Council President Tusk is expected to circulate a draft negotiating guidelines on the EU-UK relationship (as soon as 5 Mar) ahead of a meeting between EU ambassadors (ex-UK) on Wednesday. 

      • The state of flux in Brexit talks will dictate GBP and Gilts moves near-term since the chance of a BOE hike as soon as 10 May is implicitly predicated on a smooth Brexit deal. UK economic data will likely play second-fiddle to Brexit news, but this week we will monitor services/composite PMI (Mon), Halifax house px (Wed) and UK trade balance, UK IP/manufacturing production and UK NIESR GDP est. (Fri).


  • Growth:

    • Consumption: The outlook for consumer spending remains lackluster as anemic pay combined with heightened economic uncertainty and tighter lending conditions mean demand growth will probably remain subdued ahead.​

    • Budget assumptions prepare for pessimistic growth outlook (23 Nov-17): Chancellor of the Exchequer Philip Hammond delivered the Autumn Statement (23 Nov-17) and made significant downgrades to the UK's growth outlook:

      • 2017 from 2% to 1.5% (in line with Bloomberg consensus, as of 23 Nov-17)

      • 2018 from 1.6% to 1.4% (Bloomberg consensus: 1.4%)

      • 2019 from 1.7% to 1.3% (now sub-Bloomberg consensus: 1.6%)

  • Monetary policy: BOE has indicated its latest hike (2 Nov-17) is not the start of a tightening cycle, akin to a "one and done" move after BOE MPC members began sending hawkish signals in September.

    • Benchmark rate: 0.50%​

    • People: 

      • Governor Mark Carney​

      • Deputy Governor Ben Broadbent

      • Deputy Governor Dave Ramsden: Dissented to MPC's decision to hike on Nov. 2

      • Chief Economist Andy Haldane

      • MPC member Gertian Vlieghe

  • Domestic politics: The continuity of PM May's Conservative govt is at risk from within the party (from rebel MPs and possibly cabinet members). 48 MPs are required for a no-confidence motion to remove her from office. The prime minister only has a majority in the House of Commons thanks to the support of Northern Ireland’s Democratic Unionists (DUP), which makes her vulnerable to any rebellions. PM May's cabinet also saw two resignations in Nov-17. Externally, Labour Party leader Jeremy Corbyn has questioned PM May's ability to lead. However, the political headache of negotiating Brexit means that no Tory politician - nor Corbyn himself - would willingly sign up to take May’s place.

    • Brexit: ​

      • Parliament will be granted a mostly symbolic take-it-or-leave-it vote on the final terms of Brexit

      • European Union Withdrawal Bill: 66 pages long (as of 14 Nov-17), but 188 pages of amendments have been put forward so far. Both opponents and supporters of Brexit see this as their chance to try to influence the process of leaving the EU.

  • EU-UK Brexit negotiations: Negotiations between the U.K. and the EU on the transition period are aimed at reaching a deal by the end of March 2018. Any longer would raise doubts over whether it brings enough certainty to businesses over what sort of regime they’ll be operating under when Britain leaves the bloc in March 2019. Both sides agree on the broad principles of the transition period. The U.K. will lose its say in EU decision-making but little else will change. It will remain subject to EU legislation and court decisions and have to allow EU citizens to freely live and work in Britain. If the two sides fail to reach a full agreement before April 2019, the deadline mandated by the EU’s formal withdrawal procedure (“Article 50”), the UK will still leave the EU but on less favorable economic terms.

    • Latest:

      • PM May's Brexit speech (2 Mar-18): ​

        • Commentary: ​

          • FT via Sandbu 'Free Lunch' (5 Mar-18): In substance, the UK position may seem largely unchanged. But May set out several important, and new, principles that, in effect, will allow significant substantive changes as the negotiations go along.​

            • ​First, the language of “binding commitments” and “reciprocal binding obligations” is important. It tells the British people, for the first time, that it makes sense to exercise sovereignty in a way to tie one’s hands in order to have predictable relations with equally sovereign partners.

            • Second, May stated that the European Court of Justice will continue to affect the UK. Her previous red line has been reduced to a promise that the ECJ must not have “jurisdiction” in the UK. But ECJ jurisprudence could be relevant for UK court deliberations, for the rules under which the UK would participate in certain EU agencies, and if “Parliament passes an identical law to an EU law” so that “we both interpret those laws consistently”.

            • Third, about that agency participation and parliament passing identical laws to the EU: this is of course the “regulatory alignment” that has become part of the Brexit vocabulary in recent months. Part of the prize May’s pragmatic turn brings home is to make it politically possible — not before time — to say that there are many areas where there is nothing for the UK to gain from having “control of its laws” if that means choosing different rules from the EU, because it would just make anything from flying to trading harder and more costly. She is saying, in essence, if it ain’t broke, don’t fix it.

            • The two big caveats are the areas most pessimists have highlighted: no willingness to consider a customs union and continuing talk of the UK unilaterally choosing where it does or does not want to diverge from EU rules.

              • ​The first is, of course, a problem for the Northern Irish border: only a customs union and full regulatory alignment on goods can avoid a physical border.

              • The second is the “cherry-picking” problem. May defended cherry-picking by saying that every trade deal has an element of it. But, while true, that clears the way for capitulating to the EU’s demand on a much more specific definition of cherry-picking, which is that you cannot have single market terms (what’s legal to sell in one country can be sold in the rest of the single market with no further requirements or controls) if you don’t accept all the single market acquis. May might just as well have said that the EU-UK deal will be “bespoke” because all trade agreements are bespoke.

            • The speech, in other words, has prepared the political ground at home for taking the UK into something like a half-EEA relationship. The overall positive reactions show that it did so successfully.

    • Transition Period: 2yrs after “exit date” of March 29, 2019. PM May is seeking one strictly limited, two-year transition ('clear double lock'). Other details:

      • EU market access should continue

        • U.K.’s red lines, including ending freedom of movement, means that the country can only expect a trade deal similar to the one that Canada has, EU chief Brexit negotiator Michel Barnierhas said. That means the EU position is that there will be only limited access to the bloc’s financial services market, European Commission officials told diplomats (30 Jan-18).​

      • UK will continue to pay into the EU budget and obey its rules during that time​

      • EU citizens' rights: There is disagreement over the terms of the interim deal signs in December. The EU says the U.K. was aware at the time of signing the interim deal that the citizens’ rights cut-off date would move to the end of the transition. A person familiar with the U.K. negotiating position said that’s not the case.

    • Post-Transition Period: ​

      • EU citizens​' rights

      • Irish border

      • Legal/Courts: Where there’s uncertainty, UK courts will take the ECJ into account

      • Regulations: ‘New partnership’ on regulatory issues. Reject EEA/Canada-style deal


Twitter: [EMgist Sweden] [EMgist SEK]

  • Strategy:​

    • SEK:

      • Strategic long EUR-SEK (5 Mar-18): This week will feature more - likely dovish - commentary from the Riksbank: Governor Ingves (Mon), Ingves/Ohlsson (Tue, in parliament hearing) and Open Forum (Thu). Any comments echoing Governor Ingves' concerns - expressed last week - about low core CPI and pass-through implications from an appreciating currency would sustain Swedish Krona underperformance vs EUR. Relevant economic data this week include PMI services and current account balance (Mon), industrial orders (Tue) and home prices (Fri). Also this week, Sweden PM Lofven meets Trump.

  • Macro: 

    • Week ahead (12 Mar-18): Policy divergence between Norges Bank and the Riksbank - and in turn long NOK-SEK - are supported by relatively better economic, inflation and housing market dynamics in Norway's relative to those of Sweden. In Sweden this week, we watch house prices (Mon), CPI (Wed) and inflation expectations and unemployment (Thu).​


  • Growth - Property sector poses risks to economy otherwise in an upswing

    • Property investment: In 2017, property investment contributed +1ppt to GDP yoy growth (Nordea, 20 Nov-17). In Nordea baseline, it would detract -0.5ppt in 2018, -1ppt in 2019.

    • Household debt: Sweden’s Riksbank says “high and rising household indebtedness poses the greatest risk to the Swedish economy” (21 Nov-17). Average debt-to-income ratio rose to 338% in Sept. 2017 from 326% a year earlier. Household indebtedness is continuing to rise faster than incomes, with indebtedness highest among young and urban households.

    • Commentary:

      • SEB (Nordic Outlook, 21 Nov-17): ​SEB sees actual Swedish GDP growth of 3.2% in 2017 and 2.6% in 2018 compared with forecast from Aug. of 3.2% in 2017 and 2.8% in 2018. Economic boom in Sweden has broadened, as exports and industrial capital spending accelerate with the help of robust global conditions and a weak krona. That offsets to some extent the signs of weakness that are beginning to be visible in the Swedish housing market and that are expected to result in a slowdown in construction ahead. Yet the strength of economic activity and the labor market, low interest rates and a continued housing shortage suggest a moderate home price downturn. In SEB main scenario, home-price drop will be limited to 5-10%, which isn’t enough to change economic growth picture to any great extent.

  • Monetary policy - Property market complicates Riksbank optionality to remove accommodation, but nevertheless likely to end QE on 20 Dec-17: Developments in the housing market - to the extent it may affect overall economic and inflation outlooks - could cast doubts over imminent monetary tightening at the Riksbank. For its part, the Riksbank has continued to signal that positive economic developments - namely high growth, an increasingly hot labour market and CPI close to target - do not yet justify any interest rate hike so soon. Markets are focused on whether the Riksbank will - on 20 Dec-17 MPC - mirror the ECB and end/reduce QE purchases or instead extend QE. According to Nordea (7 Nov-17), Riksbank Minutes of the 26 Oct-17 MPC confirm soft stance but suggests the current board consensus sees QE extension as unlikely. Likewise SEB (22 Nov-17) doesn't see QE extension. If the Riksbank extends QE, it could also flatten its repo rate path.

    • Property sector risks

      • Danske (22 Nov-17): In a report on Wednesday titled “What If Swedish Housing Prices Drop 15-20 Percent?”, Danske Bank A/S says the property market development now poses a risk to economic growth and the inflation outlook. “Previous downturns in the housing market suggest a fairly big impact on GDP via the residential investments ... Our scenario implies sub-par growth but no recession.”

      • Nykredit (22 Nov-17): "The combination of high debt levels and a large reliance on adjustable-rate loans makes Swedish households vulnerable to negative economic shocks"

      • SEB (21 Nov-17): ​​​A more dramatic home-price drop “might pose a new type of dilemma for the Riksbank”. Property market weakness risks “gloomier economic growth prospects at the same time as greater scepticism about the Swedish economy weakens the krona, thereby creating an inflation impulse”. However, SEB says the Riksbank has for a long time warned about housing prices and household indebtedness but without allowing that to influence its actions (22 Nov-17).

      • Danske Bank (20 Nov-17): If the govt decides to implement FSA’s stricter amortization rules, it could weigh further on market sentiment

    • Inflation: SEB (21 Nov-17) sees CPI rising 1.8% in both 2017 and 2018, unchanged from Aug. Sees CPIF rising 2.0% in 2017 and 1.8% in 2018 versus Aug. forecast of 1.9% in 2017 and 1.7% in 2018.

    • Consensus forecasts (21 Nov-17):

      • Economist survey: -0.50% (unch., end-2017), -0.15% (end-2018, lower from -0.10% in Oct-17)​.

      • OIS-implied: More dovish than economists. Probability of a rate hike by 3 July-18 MPC is only 32% (down from nearly 50% in 1H-Nov-17).

      • SEB (Nordic Outlook, 21 Nov-17): -0.25% (end-2018), 0.50% (end-2019). Revised lower from 0% (end-2018), 0.75% (end-2019).

    • QE: SEB (21 Nov-17) says Riksbank will probably stop QE bond purchases at end-2017. SEB (9 Nov-17) believes Riksbank will re-invest at least parts of its holdings in SGB1052 bond already in 2018; re-investment is likely to be substantially larger than any eventual fresh QE purchases. Says Riksbank owns almost SEK 50bn of the SGB1052 bond maturing in March 2019.

    • Reference: ​

      • Riksbank rates/targets: 

        • Policy rates (21 Nov-17): -0.50% repo rate, -1.25% deposit rate, 0.25% lending rate

        • CPI target: 2%​ +/-tolerance band

      • People: ​

        • Governor Stefan Ingves

        • First Deputy Governor Kerstin af Jochnick: Data-dependent on whether to extend QE in Dec.

          • 21 Nov-17: Jochnick said the krona is only temporarily weak and that there are not yet any visible effects from lower housing prices on private consumption or housing investments

        • Deputy Governor Per Jansson: Most dovish​. Would have liked to present an extension of the QE program and says timing of the first rate hike should be delayed (minutes from 25 Oct MPC).

        • Deputy Governor Martin Floden: Moderate hawk. Won’t support more QE, but doesn't see any reason to advocate an early rate hike; highlights need to keep the krona weak; very focused on inflation and inflation expectations (minutes from 25 Oct MPC).

        • Deputy Governor Cecilia Skingsley: Moderate hawk. Won’t support more QE, but doesn't see any reason to advocate an early rate hike; highlights need to keep the krona weak; very focused on inflation and inflation expectations (minutes from 25 Oct MPC).

        • Deputy Governor Henry Ohlsson: Emerging hawk. saying that there is a limit to how much policy expansion can do to lower unemployment and that it is unwise to focus too much on small deviations in actual inflation (minutes from 25 Oct MPC). Previously said Riksbank should signal a rate hike in early 2018.

  • Ratings agencies/IMF (3 Mar-18): Ratings agencies are at the same level and outlook (AAA, Stable).

    • S&P (​AAA, Stable): 

      • 2 Mar-18: Sweden Affirmed by S&P Despite Political Fragmentation

        • S&P says it sees Sweden’s government maintaining fiscal discipline and paying down public debt despite political fragmentation. Sweden’s minority government appears set to overcome turbulent stint in office and survive until 2018 general elections. S&P expects post-election coalition building may be challenging and jeopardize reform stringency.  S&P sees Sweden’s economic boom winding down as subdued housing market cools investments in 2019. S&P estimates Sweden real GDP growth reached 2.6% in 2017. S&P sees 2018 growth reaching similar levels.

    • ​​Moody's (Aaa, Stable):

      • 2 Mar-18: Moody's Affirms Sweden's Aaa Rating; Maintains Stable Outlook

        • The outlook on Sweden's Aaa rating is stable, given the unchanged very strong macroeconomic and institutional fundamentals and Moody's expectations that those strengths will be maintained over the medium term. Moreover, government debt is expected to remain quite low, particularly given the new 35% of GDP debt anchor.

        • Negative catalysts: While currently unlikely given the stable rating outlook, Sweden's Aaa rating would come under pressure if the country's economic strength or government financial strength suffered a lasting impairment relative to Aaa-rated peers. Such a scenario could occur as a result of a sharp and sustained fall in economic activity and a corresponding shock to the government's balance sheet, most likely associated with a sharp housing market correction compounded by the high degree of household indebtedness. A significant departure from current prudent budgetary practices, which results in a material deterioration in the public finances and a rising debt trend would also be credit negative.

    • ​Fitch (AAA, Stable): 


Twitter: [Norway]

  • Strategy:

    • Strategic short EUR-NOK (5 Mar-18): Last Friday, the government reduced Norges Bank's inflation target from 2.5% to 2.0%. An increase in headline and core CPI (this Fri) could raise the possibility of an earlier rate hike, which consensus currently expects to arrive only in early 2019. The Norges Bank meets next on 15 March. Industrial production and the Economic Outlook Report are due Thursday. ​

  • Macro: 

    • Week ahead (12 Mar-18): In a relatively light week for European economic data, we focus on Scandinavia where we are positioned long NOK and short SEK vs the EUR. Norges Bank meets on Thursday ahead of trade balance (Fri). Last Friday saw Norwegian inflation handily beat consensus estimates: Headline 2.2% (vs consensus 1.8%, prior 1.6% yoy) and core 1.4% (vs consensus 1.3%, prior 1.1%). This puts inflation closer to achieving the NB's target, which the government reduced from 2.5% to 2% on 2 March, raising the possibility of an earlier rate hike - the main rationale behind our short EUR-NOK recommendation (see  Week Ahead in Global Macro: US NFP, Tariffs, ECB, BOJ, RBA, China NPC/CPI/Trade, BOC, BNM, 5 Mar-18).​


  • Growth:

    • Latest: ​

      • 12 Mar-18: The government revised down unemployment forecasts while predicting stronger exports and a revival in oil investments. The upswing plays into the hands of Governor Oystein Olsen, who has only been a reluctant rate cutter amid concern over a buildup in consumer debt after years of soaring housing prices.​

  • Monetary policy: 

    • Statement: 

      • 15 Mar-18: Norges Bank Sees Rate Increase Most Likely After Summer 2018. Sees key rate at 0.58% in Q3 vs prior 0.54%, 0.89% in 1Q19 vs prior 0.74%, 1.01% in 2Q19 vs prior 0.85% ​

    • Commentary: ​

      • 13 Mar-18: It’s more likely that rates will be hiked before December than after. We see a fifty-fifty probability that the rate path this time will indicate a hike already in September - DNB​

        • The bank will “signal with 100 percent certainty that a rate hike will occur in 2018 and are tilting toward a September lift-off - SEB


Updated 7 Nov-17

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