Cautious stock market optimism with nervous undertone
Profit-taking − especially by investors in American technology stocks − continued during much of last week, but many markets rebounded towards the end. As a result, the MSCI All Country World Index of equities has been largely unchanged over the past week. It is a normal pattern for stock markets to take a breather after a sharp upturn like the one we have seen in recent months.
Meanwhile there has been no shortage of news headlines this past week, for example that after first pausing Phase 3 trials of its COVID-19 vaccine, AstraZeneca has now resumed them. Some pharmaceutical companies are saying that a vaccine may be available before the end of 2020. This has fuelled risk appetite in financial markets, despite new virus spread reports.
The 100 billion kronor question
On September 21 the Swedish government will submit its autumn budget bill for 2021 to Parliament. So far nearly SEK 60 billion worth of reforms have been presented, including about SEK 20 billion in additional funding for municipal and regional governments, income tax cuts of SEK 13-14 billion, SEK 10 billion worth of green economic recovery projects and extensions of various COVID-19 crisis responses, such as the elimination of the one-day waiting period for receiving sickness benefits. Finance Minister Magdalena Andersson recently declared that "To pull Sweden out of the recession as quickly as possible, we need to restart our economy. That's why we are presenting a historic budget that includes proposals worth more than SEK 100 billion." This implies that announcements of further reform proposals can be expected in the coming days.
Brexit negotiations hit a barrier
British Prime Minister Boris Johnson has set a new deadline for reaching a trade agreement with the European Union: it must be completed by October 15. Otherwise the United Kingdom is threatening to end its transition period on December 31 without any trade agreement. The UK government is also apparently trying to rewrite the existing withdrawal agreement with the EU, for example regarding trade with Northern Ireland. It is not unusual for this kind of negotiations to take a long time and for agreements to be reached at the last minute.
Worries about Brexit (British withdrawal from the EU) have nevertheless caused the British pound to fall further. Those readers who are interested in foreign exchange market forecasts for some of the major currencies will find a lot of solid information in SEB's latest Currency Strategy research report (PDF, 40 pages) by clicking here.
Federal Reserve - New framework but no rush to change guidance
No changes are to be expected at today's US central bank policy meeting, since economic developments do not call for new measures, even though uncertainty has increased as a result of the failure of Congress to pass additional support packages while volatility in the stock market has increased.
The Fed's review of the monetary policy framework, which means that it will focus on average inflation and thus compensate for current below-target inflation with a period of above-target inflation, will have no immediate effect on its monetary policy. The Fed has already indicated that its key interest rate will remain close to zero for a lengthy period.
PS. In case you missed the latest big quarterly report from SEB Investment Strategy last week, you will find Investment Outlook: Back to the future, plus a 2-page summary and an 8-minute video on our experts' current market view, by clicking here.
Our market view
We expect new COVID-19 outbreaks to be met with "smart" lockdowns and believe that governments and central banks will supply the necessary stimulus measures. The recovery will thus continue, although because of repercussions from the lockdowns it will take time before we return to pre-pandemic economic growth trends.
This provides a sound basis for share price increases, although the surge in stock market indices over the past six months means that our bright outlook is already largely priced in. There are good arguments for accepting higher valuations − especially low interest rates and yields, as well as major stimulus packages − which suggest continued healthy growth. Looking ahead, we expect a more normal stock market pattern after the vigorous recovery, but we are sticking to our recommendation of an overweight in equities and other risk assets such as corporate bonds in the high yield segment.