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Market Outlook: Central banks in the spotlight all week

Last week the world’s stock markets lost ground, with the Swedish all-share index (OMXSPI) down by 1.2% while America’s broad S&P 500 equity index fell by half that much. In fixed income markets, US yields fell after the Labor Department announced slight lower August inflation, but 10-year Treasuries are now yielding just above 1.32%.

Central bank announcements in many countries

As expected, Sweden’s Riksbank left its key interest rate unchanged yesterday at 0.0%. Nor is any rate hike in sight during the central bank’s three-year forecast period. Meanwhile bond purchases will continue as planned until the end of 2021. The Riksbank revised its inflation forecast higher but this will not affect monetary policy, since the upturn is viewed as transitory.

Aside from the Riksbank, numerous central banks around the world will be making policy announcements this week. In terms of the global economy, the US Federal Reserve will of course occupy the spotlight with its announcement on September 23 (later today). Norges Bank and the Bank of England will make their announcements on September 24; we believe Norway will be the first developed economy after South Korea to hike its key rate during the pandemic. Central banks in Japan, Switzerland and numerous emerging market countries (including China) will also make policy announcements.

Chinese real estate developer Evergrande close to defaulting

Evergrande, China’s second-largest property developer, is reportedly having major problems paying interest on its debt portfolio, totalling about USD 305 billion or 1.8% of Chinese gross domestic product (GDP). Evergrande’s impending default has raised the question of whether China is headed towards its own Lehman Brothers crisis and what repercussions this might have on the global financial system and global demand.

Swedish home prices rose in August

According to Valueguard, Swedish home prices rose by 1.6% in August compared to the previous month, equivalent to a seasonally adjusted increase of 0.2%. The price upturn was especially strong in Stockholm, where single-family houses rose by 3.1%. During the first half of September, prices of co-op units (mostly flats) in Stockholm rose by 0.8% while in Gothenburg they fell by 0.1%.

 

Our market view

In recent days stock markets have lost ground, with total declines in the range of 3-5%. As of Tuesday, September 21 the Eurostoxx 600 index was 0.7% lower than last Friday, September 17, while America’s S&P 500 was 1.8% lower.

Triggering much of these declines are the problems of Evergrande, a heavily indebted real estate giant in China. This company alone accounts for a large proportion of the outstanding corporate bonds in China. A default would risk sending shock waves throughout the Chinese financial system, with potential global consequences. Global stock markets are also probably being pulled down by concerns about the spread of COVID-19 and uncertainty about when and how the US Federal Reserve will begin to taper its stimulative bond purchases.

As for developments in China, we believe that the Chinese government will intervene to stabilise the financial system and that it also has the necessary resources. But at the same time, Beijing does not want to signal that companies can borrow heavily and then be bailed out with tax money. This is a difficult balancing act. Losses will probably occur in conjunction with a reorganisation of Evergrande, and there is an obvious risk that other highly leveraged real estate companies may run into problems in the future − even if no other company has such large debts or is as leveraged as Evergrande. We can expect a lot of uncertainty in China for some time to come, but we do not currently believe this will have any major global effects. Uncertainty about future actions, on the other hand, gives us reason to continue monitoring events in China extra closely.

The Fed is expected to reduce its bond purchases soon, but is also likely to be sensitive to events in global financial markets – for example if problems in China have a larger international impact. The recent weak performance of stock markets should also be viewed in light of the largely uninterrupted rally we have seen in recent quarters; in itself, a correction is not surprising.

Market turmoil may, of course, continue for some time and new downturns cannot be ruled out. However, we do not expect that what is happening, assuming the situation does not clearly worsen, will have any significant effect on either global economic growth or corporate earnings. The fixed income market has also been relatively stable, and equities will continue to enjoy strong fundamentals – including healthy growth and low interest rates.

During the summer we signalled a slightly higher level of caution by lowering the previously high proportion of equities in the portfolios we manage, but we still hold slightly more equities than in a normal situation. This reflects our view that the volatility we are now seeing will not affect the long-term outlook. If share prices should continue to decline, buying opportunities may arise, but we are not there now. So far, Chinese developments in particular are too uncertain and difficult to assess.