Investment Research — General Market Conditions

12 December 2018

Danske Daily
Trump to intervene in Huawei case if necessary
Market movers today Selected reading from Danske Bank
 Focus today will continue on the Brexit talks ahead of tomorrow’s EU summit and the
US-China trade negotiations after Trump tweeted yesterday that there will soon be  Brexit Monitor: Brexit clash
‘big announcements’ on this after ‘very productive conversations’. postponed to January, at the
earliest
 In terms of data releases, US CPI core inflation data is due out today. We estimate CPI
 Macro Strategy Views Podcast:
core rose +0.2% m/m in November in line with the recent trend (2.2% y/y). The world in 2019 - slower
 CPIF inflation data from Sweden is also due for release. We expect it to fall short of growth, higher inflation
the Riksbank’s forecast. We also have a budget vote to look forward to. See the Scandi  OPEC+ agrees on big output cut
section for more details.  Harr’s View: The world in 2019:
lower growth, higher inflation
 ECB Preview – A new chapter of
Selected market news dovish tightening
US equities could not hold on to gains yesterday on the positive trade news. In Asia,
however, equities are moving higher again on further trade optimism after the Huawei Follow us on Twitter :
CFO arrested in Canada was granted bail on Tuesday and Trump said that he would
@Danske_Research
intervene in the case if necessary to ensure a good trade deal, see Bloomberg article, 12
December. Yesterday, there were unconfirmed reports that China would cut US car tariffs Video
from 40% to 15%. This would put US car tariffs in line with tariff rates for other countries, Danske Bank research playlist
as the general car tariff rate in China was reduced from 25% to 15% on 1 July.

According to Reuters yesterday, some sources say the US considers issuing a travel
warning to US citizens travelling to China as they fear a retaliation from the arrest of the
Read more in Danske Bank’s recent
Huawei CFO. Canada yesterday confirmed that one of its citizens was detained in China forecasts and publications
but that it saw no explicit connection to the Huawei case. See the South China Morning
Post, 12 December, for more on this story.  Nordic Outlook

In UK Prime Minister Theresa May could be facing her biggest crisis as a confidence  Yield Outlook
vote could be coming, see Bloomberg, 11 December. The GBP fell yesterday in response
 FX Forecast Update
to the high uncertainty over Brexit as it calls into question her ability to negotiate with EU
leaders at the Summit on Thursday if she is to be toppled later internally. However, even if  Weekly Focus
there is enough backing for a confidence vote, it is not clear that she would lose it. It would
require a majority among the 315 Conservative members of parliament. EU leaders have
been defiant about giving further concessions in talks with May in recent days.

On a more positive note, the German ZEW index for November surprised on the upside
yesterday rising to -24.1 to -17.5. It has moved broadly sideways over the past four to five
months, pointing to some stabilisation soon in the German slowdown.

Chief Analyst
Allan von Mehren
+45 4512 8055
alvo@danskebank.dk

Important disclosures and certifications are contained from page 2 of this report. https://research.danskebank.com
Danske Daily

Scandi markets
Today’s main event, as far as Sweden is concerned, is without a doubt the inflation print
for November. These numbers are most likely key for the Riksbank in anticipation of its
monetary policy meeting next week. We expect CPIF to fall by 0.1% m/m and to print 2.1%
y/y, slightly below market consensus (unchanged and at 2.2%, respectively). The
Riksbank’s own forecasts are for CPIF to increase by 0.1% m/m and to print 2.4% y/y. The
November numbers do not usually deviate all that much from October. We believe that the
effect of falling oil prices is compensated for by slightly increasing prices on electricity
(which weighs heavier in the basket), netting each other out.

Other than this, we also have a budget vote in Sweden to look forward to. Given the recent
events, it seems that the budget proposed by the coalition of Moderates and Christ
Democrats are most likely to gain support in the chamber as the Sweden Democrats have
pledged to vote for it. The main takeaways from the budget proposition are lower income
taxes and more funding for both the defence and the municipalities in comparison with the
transitional budget now in place.

Fixed income markets

French government bonds remain under pressure as the measures introduced by President
Macron are expected to lift the budget deficit in 2018 from 2.8% to some 3.4% of GDP
according to the French Budget Minister Gerald Darmanin. Looking forward, we expect to
get a negative response from the EU commission and thus more pressure on French govies.

The curve in the US continues to flatten and the slope of the 2-10Y US Treasury curve is
now at a year low at 11bp as the market focuses on the upcoming FOMC meeting and the
rate hike from the Federal Reserve. Given the expectation of more rate hikes in 2019, the
flattening of the US Treasury curve is expected to continue.

The Bund ASW-spread continues to widen and we have now hit 60bp. There are limited
signs of a tightening of the Bund spread despite 2019 drawing closer and the new issuance
season. Furthermore, we are not seeing the same pattern in the Bobl and Schatz spread. In
our view, the Bund spread is driven by several factors: The QE reinvestment programme
will be heavily tilted towards Germany in the first couple of months. There is some
speculation that the ECB will announce an ‘operation twist’ for 2019, where it will buy in
the long end of the curve. However, we doubt this will happen.

FX markets
EUR/SEK has turned decisively higher after last week’s visit below 10.20 (10.1625 low),
which is not surprising given the normal seasonality around the PPM date, which occurs
today. However, the date has often marked the local peak for EUR/SEK. If we are correct
on our below-Riksbank and below-consensus inflation forecasts (see Scandi section), it
should push EUR/SEK higher today. That said, we think that EUR/SEK will edge lower
through year-end, again testing below 10.20, as the SEK should be supported if the
Riksbank raises the repo rate next week, which we think it will even though inflation has
somewhat undershot its forecasts.

EUR/GBP has stabilised above the 0.90 level and we now await the outcome of the EU
Summit tomorrow, where the EU leaders will discuss Brexit. Focus for the cross remains
on (1) whether the UK Prime Minister can get sufficient concessions from the EU in order
to change the Commons’ stance on the deal and (2) timing of a potential vote in the House
of Commons. The latter seems most likely in January and we expect EUR/GBP to remain
volatile and range bound for longer. Meanwhile, speculation of a ‘no confidence’ vote on
the PM is brewing and could send EUR/GBP higher if triggered.

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Danske Daily

Key figures and events

Wednesday, December 12, 2018 Period Danske Bank Consensus Previous

9:30 SEK Underlying inflation CPIF m/m|y/y Nov -0.1%|2.1% 0.0%|2.2% -0.1%|2.4%
9:30 SEK CPIF excl. Energy m/m|y/y Dec 0.1%|1.5% 0.5%|1.6%
9:30 SEK CPI m/m|y/y Nov 0.0%|2.0% -0.1%|2.3%
11:00 EUR Industrial production m/m|y/y Oct -0.3%|1.0% -0.3%|0.9%
11:00 EUR Employment, final q/q|y/y 3rd quarter 0.2%|1.3%
14:30 USD CPI headline m/m|y/y Nov 0.0%|2.2% 0.3%|2.5%
14:30 USD CPI core m/m|y/y Nov 0.2%|2.2% 0.2%|2.2% 0.2%|2.1%
16:30 USD DOE U.S. crude oil inventories K
20:00 USD Budget statement USD bn Nov -100.5
Source: Bloomberg, Danske Bank

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Danske Daily

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Report completed: 12 December 2018, 06:41 CET

Report first disseminated: 12 December 2018, 07:15 CET

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