Just as the markets were convincing themselves that a negative interest rate environment was the ‘new normal’, the Swedish Riksbank signalled that it could actually be the ‘old normal.’ This would be a significant paradigm shift for the global markets and particularly those countries still running negative rates: The eurozone, Japan, Denmark, Switzerland and Hungary.
Sweden’s decision to move the repo rate (the rate of interest at which banks can borrow or deposit funds at the Riksbank for a period of seven days) interest rate from -0.25% to zero is a psychologically important step.
The Swedish Riksbank was not the first central bank to drop base rates to below zero. The first cut, to -0.10%, occurred in 2015, but it is the first in that group to get rates back out of negative territory.
The OMXS 30 index of leading Swedish stocks took the rate hike in its stride and continues to hold its position near year-to-date and all-time highs. The Riksbank’s decision to hike rates was explained to be based on asset markets overextending themselves. The fundamental metrics relating to the Swedish economy show it slowing down, but Sweden, like other countries with sub-zero rates, is balancing the problem of the stock market and the underlying economy not being the same thing.
Swedish stock index (OMXSTO:OMXS30) – Year to date
The ‘inflationary pressures on assets’ mentioned by the Riksbank are demonstrated by the steep gradient of the OMXS30 chart when viewed on a longer time scale. The fact that the central bank held base rates below zero while the stock exchange punched new highs might be the quirky kind of statistic referred to when the paradoxes of the current global economy are considered by economic historians.
Swedish stock index (OMXSTO:OMXS30) – 1995-2019
In the forex markets, the strength of SEK against USD over the last 12 months also reflects increased international demand for Swedish assets.
SEKUSD – Five-year price chart
Back in 2015 when Sweden first dipped into negative rate territory, it was the travails of the Japanese economy that were referenced to justify the radical move. In a statement released on Thursday, the Bank of Japan gave an update on the long-running saga:
“Japan’s economy is likely to continue on a moderate expanding trend, as the impact of the slowdown in overseas economies on domestic demand is expected to be limited, although the economy is likely to continue to be affected by the slowdown for the time being.”
Tom Learmouth, Japan economist at Capital Economics, told CNBC’s Street Signs on Thursday:
“It seems as though … there was much more expectation of easing in the October meeting but there’s some positive signs coming from the global economy.”
Japanese stocks were down on the day. The Nikkei closed at 23,864 – a daily fall of 0.29%. Prior to the US open, Japanese yen (USDJOY) was trading at 109.39 per dollar, strengthening from an intra-day low of 109.67.
USDJPY – Five-day price chart – 12th December-18th December 2019
The 109-110 level looks likely to throw up a few trading signals.
USDJPY – Five-year price chart – 2014-18th December 2019
With the Bank of Japan resisting the temptation to change direction on monetary policy, there may be a period of choppy sideways price action due to the large number of moving averages in the 108-110 price range.
USDJPY Daily moving averages
The Bank of England was the third of the central banks to hit the headlines on Thursday. Governor Mark Carney could update the markets that the rate-setting committee voted 7-2 to keep rates at 0.75%. This was seen as a dovish move based on weakening fundamental data and the fear of the unknown as Brexit finally begins to take place.
The Bank of England’s statement read:
“If global growth fails to stabilize or Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected U.K. recovery.”
Keeping rates ‘as is’ wasn’t enough to halt sterling’s recent fallback to the 1.30-1.31 level versus the US dollar.
GBPUSD – Five-day price chart
The mood is not particularly positive. The statement continued:
“Household consumption has continued to grow steadily, but business investment and export orders have remained weak. Financial markets have remained sensitive to domestic policy developments.”
Incumbent governor Mark Carney couldn’t provide the name of his successor and the uncertainty about the transition process also added to the gloom.
More concerning for the Bank of England was reports that the pertinent points of its announcements were being leaked to the market and allowing unscrupulous investors to front-run the market. The FCA is investigating a situation where an attendee at the Bank of England press conferences was able to update contacts in the market of the announcement up to seven seconds before the information was on general release. The ‘trading opportunity’, which could have generated tens of millions of profits for those involved, comes from a ‘technology arbitrage.’ The standard announcement is made in video format, but the contingency announcement is in audio only. Both reports share the same information – the audio is a ‘back-stop’, but accessing it allows the listener to get the news first.