For several years, we have been warning that what is regularly showcased as the Scandinavian utopia is not all it’s cracked up to be. Creaks and strains can be detected in relations with immigrants, the green credentials of an oil-based economy, money-laundering allegations, and today yet another overly indebted airline.
This week we’re focusing on Sweden where, for years, the Riksbank has been threatening to raise interest rates and get them back to ‘normal’. From the record low minus 50 basis points on the repo rate (and minus 1.25 on the deposit rate) first introduced early in 2016, in December 2018 it raised them by 25 basis points to minus 25. At this month’s rate-setting meeting on 13 February they kept the key rate steady, but vowed to raise it further in the second half of the year. Hardly what you’d call a normal interest rate environment. Their track record isn’t exactly stellar, with rate rises in 2010 and 2011 that had to be reversed – and then some – because inflation slumped late in 2011 and in 2012.
Like so many central banks nowadays, it too is independent of government and sets rates to encourage economic growth while targeting the consumer price index (CPI) at 2 per cent over the medium term. Published this week, inflation fell by 1.0 per cent in January as retailers slashed prices post-Christmas, taking the annualised rate to +1.9 per cent rather than the 2.2 predicted. In fact, consumer prices have risen by less than 2 per cent for most of the time since 2000, dropping to almost minus 2 per cent in 2009.
The impact of both these inputs can be felt in the yield of benchmark 10-year Kingdom of Sweden bond yields. Currently just 33 basis points and their lowest since November 2016, they are as low as they got to in 2015 and almost 2016’s record low at zero. The secular trend has been lower for at least 20 years and we see no change on the horizon. Negative rates are a distinct possibility, as they are already in two-year (-0.43 per cent) and five-year (-0.14 per cent) maturities. Don’t forget that 10-year German bunds yielded a record low minus 20 basis points in 2016.
The effect is also seen in the exchange rate, with the Swedish krona this year’s worst performing European currency against the US dollar – so far at least. Against the euro it has yet to reach our target of 11 per euro, but the trend to weakness since 2012 is decidedly intact; we will also not rule out a surge to 2009’s weakest ever at 11.78. We also expect it to weaken against Norway’s krone from January’s 1.02 SEK per NOK through 1.10 to at least 1.13. This is a key variable in the functioning of both these economies.
As for the key index of the 30 most active shares traded on Stockholm’s bourse, this, like those in the US, suffered badly in Q4 2018, denting our bullish outlook. A potential broadening top chart pattern has been tested but held at year-end, so the jury is still out. The sharp but short break of trendline support taken from 2008’s low could, in the end, turn out to be a false break, in which case we’d continue to expect a rally through 2015’s record high. Tread carefully as exchange rates and share prices battle it out.
