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Market Outlook: Stock market turmoil ahead of US central bank conference

  • Preliminary purchasing managers’ indices for August have just been published
  • Swedish home prices fell again in July

After four weeks of rising share prices, the trend reversed last week. There were widespread declines in the world’s stock markets, including a 1.2% downturn for America’s broad S&P 500 Index and a 1.8% downturn for Sweden’s All-Share Index (OMXSPI) between August 12 and August 19. One reason for lower risk appetite was that both short-term market interest rates and long-term bond yields have again begun to move higher.

This week has seen continued share price declines and rising yields. Ten-year US Treasury yields rose above 3 per cent on August 23. This Friday, August 26, US Federal Reserve chairman Jerome Powell will address the Kansas City Fed’s annual Jackson Hole, Wyoming symposium on the topic of “The Economic Outlook”.

The Swedish krona has also struggled amid gloomy financial market sentiment, falling to SEK 10.71 per US dollar on August 22 before recovering slightly.

The World

Preliminary purchasing managers’ indices for August have been published

On Tuesday, “flash” purchasing managers’ indices (PMIs) for August were published, covering both Europe and the United States as well as Japan, Australia and other countries. In recent months, global business sentiment has fallen. Yesterday’s preliminary August figures continued in the same downward direction, largely due to such factors as soaring energy prices and persistent high inflation.

Exactly as expected, most sub-indices in Europe fell to slightly below 50, indicating that growth is negative. In the US, flash PMIs also fell for both manufacturing and services, although the manufacturing figure remained above 50.

The Nordic countries

Swedish home prices fell again in July

According to statistics reported on August 23 in Valueguard’s HOX Index, Swedish home prices are continuing to fall. At the national level, they were down 2.9% month-on-month. Adjusted for seasonal effects, this represents a downturn of 1.7%. Since their peak in April, home prices have fallen by 6%, seasonally adjusted.

Our market view

A miserable first half of 2022 in stock markets was followed by a rebound at the height of summer, while the past few days have brought renewed stock market turmoil.

In itself, it was not unreasonable that share prices climbed in July after falling by 20-30% since the beginning of the year. But this upturn was accompanied by continued discouraging signals about the global economic situation, especially in terms of growth.

There is certainly no shortage of worries at the moment. Growth forecasts are being revised sharply lower, and this is likely to continue for some time. Persistent inflation is forcing central banks to hike their key interest rates at an unusually rapid pace, while eroding household purchasing power – with the European energy crisis as the icing on the cake. Most analysts now expect a marked slowdown in growth over the next few quarters; recession is the word of the day.

Another reason why stock markets bounced back in July is probably that investors are seeing signs that the situation may eventually improve. Inflation may soon peak, especially in the United States, and many people now expect that central banks, led by the US Federal Reserve, can start cutting key interest rates again in 2023.

Because of this year's overall stock market declines, valuations measured as price/earnings ratios have come down to more normal levels. However, they still have some way to go before reaching the lows seen during previous major slowdowns. Discounting an eventual turn for the better at this early stage consequently appears risky; disappointments during the autumn cannot be ruled out.

On the other hand, strong household and corporate balance sheets, easing global supply chains and cautious investor positioning suggest that we need not see the kind of downturns in growth and stock markets that followed the global financial crisis of 2008-2009.

Overall, we have a neutral view of risk-taking and recommend a “normal” asset class allocation. Given the prevailing major uncertainties, there is an obvious risk that we will be seeing dramatic shifts ahead, both within asset classes and between different types of equity investments. For this reason, diversification – risk spreading – appears to be a sound strategy.