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Market Outlook: US stock market shrugs off Fed tapering signals, but falls again this week

The liquidity crisis affecting the huge Chinese real estate developer

Evergrande is continuing. Although the situation has calmed down slightly, the question remains how a potential real estate and financial crisis in China might impact the global economy.

Market initially unperturbed by ”hawkish” Federal Reserve decision makers

On September 22, the US Federal Reserve held its scheduled press conference and unveiled new forecasts. Fed Chairman Jerome Powell was clear about the central bank’s plans to taper its stimulative bond purchases and indicated that a decision on the matter would be announced in November. The “dot plot” of individual rate paths by members of the Federal Open Market Committee (FOMC) was a bit more hawkish than before, with half of the 18 FOMC members expecting an initial key interest rate hike as early as next year. Their median projection of the appropriate federal funds rate in 2023 and 2024 is 1.0% and 1.8%, respectively. In the longer run, they foresee a key rate of 2.5%. The US stock market reacted calmly to the Fed’s announcement, while 10-year Treasury yields climbed later in the week.

This week (September 27-28) share prices fell once again, due to worries about rising long-term Treasury yields and future key interest rate hikes, as well as higher energy prices, a possible US government shutdown in early October and the need to raise the US debt ceiling.

SPD now the biggest party in the German federal Parliament

In the German parliamentary election on September 26, the Social Democrats (SPD) won by a narrow margin over the Christian Democrats (CDU/CSU). The SPD will now hold 206 seats and the CSU/CSU 196 out of 735. Tough negotiations appear likely, with SPD leader and chancellor candidate Olaf Scholz determined to put together a coalition government – probably with the Greens and the business-friendly FDP – before Christmas. For more about the German election, see below.

Worth watching this week

This week’s statistics include US nominal consumer spending (generally expected to accelerate) as well as consumer confidence, which fell in August to a 7-month low, according to the Conference Board. In Europe the latest euro area inflation figure will be released on October 1. China will report its official September purchasing managers’ index (PMI) for the manufacturing sector on September 30.

 

Reflections – 11 questions and answers about the German election

Tug-of-war for Greens and FDP to win post of chancellor

As expected, the election in Germany – the largest economy in the European Union and Sweden’s largest trading partner – was a success for the Social Democrats (SPD) and the Greens. In Reflections, our SEB colleagues Håkan Frisén och Daniel Bergvall guide us through some important consequences of the German election
Read more by clicking here

 

Our market view

Several days ago stock markets lost ground, with total declines in the range of 3-5%. The factor that triggered much of these downturns was the problems of Evergrande, a heavily indebted real estate giant in China. 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.

In the past few days, however, we have seen a recovery in share prices. This is partly due to slightly more positive news about Evergrande, but we also view it as a general sign of stock market strength, There are plenty of reasons for concern, but we anticipate that the Chinese government will intervene in case of continued problems at Evergrande if this is required to stabilise the financial system. We are also confident that it has the necessary resources. Another reason for concern in China is that Beijing has been taking clear steps to tighten regulations and limit earnings in various parts of the private business sector. We can expect a lot of uncertainty in China for some time to come, but we do not currently believe that this will have any major global effects. Uncertainty about future actions, however, 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.

It is also important to bear in mind that right now we are in the midst of a powerful economic recovery, bolstered by extreme stimulus measures. Looking ahead, the pace of economic growth is likely to slow gradually and eventually approach more normal figures – our guess is during 2023. Meanwhile major stimulus programmes will probably be phased out gradually, so we can expect massive support for risky investments to be smaller in the future.

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.

We recently 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.