No Signs of a Rotten State in Denmark 

Investors in the week ahead are set to receive updates on Denmark’s economic health, including fresh manufacturing and unemployment figures.

While Denmark continues to contend with global growth concerns and geopolitical headwinds, the country has experienced expansionary financial conditions, amid ultra-low interest rates and contained credit balances.

Yields on two-year and five-year Danish government debt resided in negative territory intraday Thursday, with the 10-year note at 0.07% – up from its latest 52-week low of around -0.026% set in late March 2019.

Danmarks Nationalbank – Denmark’s central bank – recently observed that the country’s economy has been in “a balanced upswing for the sixth year in a row,” as growth continued in the second half of 2018, marked by a 2.2% GDP growth rate over the last four quarters. 

The central bank estimates that the Danish economy will continue to expand, but at a more moderate pace, with GDP expected to run at 1.7% in 2019 and 2020 and 1.6% in 2021 – driven in large part by private consumption, exports, and investments.

In fact, a weakened Danish krone has helped keep the nation’s exports competitive. The country’s local currency has shed more than 9.0% of its value year-on-year against the U.S. dollar.

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Danish resilience

Danmarks Nationalbank said that while the recent slowdown in world trade and prospects of lower growth in the euro area have led to “a small downward adjustment of market growth in Denmark’s export markets,” Danish firms remain well-equipped to meet demand.

While other headwinds to global growth, including U.S.-China and other cross-border trade conflicts, as well as the UK’s path to exiting the EU, pose downside risks to Denmark’s economy, these challenges will likely impact the country only modestly.

Still, parts of the nation remain vulnerable to certain external shocks.

Analysts at the Organization for Economic Co-operation and Development (OECD), for example, highlighted that Denmark’s “small open economy” is “particularly exposed to an escalation of import tariff increases and retaliatory measures from affected countries.”

Certain sectors of the country’s economy may also undergo significant adverse impacts from a hard Brexit, including spikes in trade and investment barriers between the EU and the UK, which “would have major negative economic effects” in its agricultural, food and manufacturing industries, as well British-dependent fishery business, the OECD said.

On the domestic front, the organization added that an unexpected hike in interest rates “could trigger significant drops in house prices, especially in Copenhagen, resulting in insolvent households and increased losses in the financial system.”

Against the backdrop, market participants in the week ahead will receive updates on Denmark’s manufacturing and unemployment numbers, including DILF’s Manufacturing PMI for April.

  Monday, April 29

• Manufacturing Industries, Tendency Survey (Apr)

Thursday, May 2

• DILF Danish Manufacturing PMI (Apr)
• Foreign Reserves (Apr)

The seasonally adjusted Danish PMI plunged to 56.1 in March from 61.9 in the prior month, underscored by declines in all sub-indices, except new orders.

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Among other factors, production – one of the most important sub-indices, according to DILF – fell 7.8 percentage points month-over-month to 60.5, while employment plunged 17.7 points into a contractionary level of 46.0.

DILF attributed the massive decline in the labor market to a more than doubling of respondents who said they experienced less employment, while 69% of the surveyed population replied that their job situations were unchanged.

Market participants will also receive further color about Denmark’s unemployment rate ahead of the weekend.

Friday, May 3

• Unemployment Rate (Mar)

Denmark’s central bank claims unemployment in the country amounts to just north of 100,000 persons, or 3.7% of the labor force.

The Nationalbank noted that the level of unemployment has “not yet been pressed as far down as seen during the overheating in the 2000s, but it is still around 10,000 below the cyclically neutral level, which is estimated at around 115,000 persons.

“A substantial share of this number is temporary unemployment related to job changes.”

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Overall, Denmark’s labor market appears on track to sustain its strength.

According to Fitch Ratings, the country’s gains from the earlier labor market and pension reforms will likely continue to support its employment picture.

Since peaking at 7.9% in May 2012, the country’s unemployment rate has trended downwards, reaching 5.0% in January 2019.

The ratings agency noted that it anticipates employment growth will remain strong, likely coming-in above a five-year average rate of 1.1%. It added that combined with “positive real wage growth and fiscal measures boosting household incomes, strong private consumption growth” is expected to persist, while still, highly accommodative financing conditions should support investment.

Fitch, which has assigned its pristine ‘AAA’ sovereign credit rating to Denmark, characterizes the country’s economic landscape as “wealthy” and “high-value-added,” buttressed by “strong institutions and a track record of sound macroeconomic and fiscal policy,” while the potential for “a macro-financial shock, which would be amplified by high levels of household indebtedness,” remain a remote risk.

Meanwhile, indicators of confidence have generally weakened both in Denmark, as well as abroad, over the last half year, which may signal a future slowdown in labor market improvement. 

Stocks turn south

Elsewhere, Danish equity markets appear to be on a downward path despite the country’s overall fundamental health, as well as accommodative monetary policies across several central banks, including the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve.

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Danish stocks – as evidenced by the iShares MSCI Denmark ETF (EDEN), which has among its top holdings firms such as pharma giant Novo Nordisk (NYSE: NVO), Danske Bank (OTCMKTS: DNKEY) and beer brewer Carlsberg (OTCMKTS: CABGY) – have fallen around by around 2.5% since Monday, April 15, including a further decline of 0.62% intraday Thursday.

The weakness offsets a more than 17.2% climb in the equities since its most recent 52-week low set on December 24, 2018, which nearly erased a 20.5% fall in the ETF over the mid-May to late December period.

Investors will likely be eyeing further developments in Denmark’s housing market, as well as international factors that have been spurring growth concerns, including the unfolding of U.S.-China trade talks and Brexit for additional insights into the country’s general economic and financial well-being.  

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.