Vaccine advances and a new EU fund trigger a stock market surge
The US-based drug maker Moderna announced on May 18 that in Phase 1 clinical trials, its vaccine had successfully generated antibodies against COVID-19. This triggered powerful stock market upturns both in Europe and the US early this week. Although it is still early in the process, this news reinforces market confidence that vaccines against the virus are possible. This would obviously make an enormous difference in the outlook for returning to a more normal (economic) life.
Market optimism was also fuelled by a preliminary agreement between Germany and France on a new rescue fund totalling EUR 500 billion (equivalent to 4% of the euro area's gross domestic product, GDP), to be funded by joint EU borrowing. This would finance aid grants, rather than loans, to member countries and thus represent one step on the path towards a common fiscal policy. The proposal has also encountered opposition from Austria and some other countries, including Sweden.
Record-sized federal budget deficit in the United States
Stimulus packages aimed at softening the economic consequences of coronavirus-related lockdowns have led to a new record deficit in the US federal budget. During April alone, the deficit was USD 738 billion as federal expenditures climbed to USD 980 billion while tax revenues fell by 55% compared to a year earlier. Large income tax payments normally turn April into a big surplus month for the US Treasury, but not this year. According to Congressional Budget Office (CBO) estimates, the federal deficit will total USD 3.7 trillion in the fiscal year ending on September 30 − or nearly 18% of GDP – and will shrink to USD 2.1 trillion in fiscal 2021. Meanwhile Democrats in Congress are pushing for further stimulus measures. They want to enact a new USD 3 trillion aid package that includes further direct payments to households, more generous unemployment benefits and grants to state and local governments.
US-Chinese relations approaching the freezing point
Top White House economic advisor Larry Kudlow says he is optimistic that America's Phase 1 trade agreement with China will be implemented. Meanwhile his boss, President Donald Trump, is looking for a scapegoat ahead of the November election. The US has now added additional restrictions on exports of semiconductors to Chinese telecom giant Huawei. This Friday, China will convene its National People's Congress after a two-month delay. The meeting has huge symbolic importance as 3,000 delegates gather in Beijing to confirm the country's direction, including economic policy. The message of the People's Congress to the world will be that China has successfully controlled the novel coronavirus, but President Xi Jinping is meanwhile hard pressed on several fronts.
Last week US President Trump told the Fox Business Network that he could "cut off the whole relationship" with China. This came after an announcement that the biggest US federal employee pension fund will no longer invest in Chinese equities, an indication of escalating tensions between the US and China.
Lowest oil demand in nine years
The price of West Texas Intermediate (WTI) crude oil has recovered considerably from its recent lows. The International Energy Agency (IEA) says that during May, world oil production will fall to its lowest level in nine years but that demand may be somewhat better than previously estimated − though still expected to be at its lowest level this year.
Sweden has expanded its stimulus measures
Last week Swedish Finance Minister Magdalena Andersson announced that there is heavy demand for the government's temporary wage subsidies. The government estimates that the cost of these subsidies will double to SEK 95 billion. The total direct budget impact of stimulus measures so far is SEK 240 billion, or nearly 5% of GDP. Having previously been lower than those of many other countries, in recent weeks Sweden's stimulus efforts have expanded. Our estimate is that we will see further stimulus of about SEK 100 billion this year.
Has the Swedish economy already bottomed out?
During the coronavirus crisis, Sweden's National Institute of Economic Research (NIER) will be publishing business sentiment data twice a month, including extra survey questions about the impact of lockdowns. After a record-low index level in April, we see prospects for some improvement in the extremely depressed service sector, while manufacturing sentiment will remain weak. As for households, however, our own questionnaire surveys suggest that during May they further decreased their consumption, especially for goods. Our survey also shows that Swedish households support an extension of the current restrictions by another three months.
Reflections: Should central banks buy stocks?
In an article published on May 19, SEB's Chief Strategist Johan Javeus discusses central bank purchases of company shares as a potential way of softening the economic consequences of the coronavirus crisis. Such a decision obviously depends primarily on how the crisis unfolds, but it is worth noting that the past decade has been filled with surprising and highly controversial decisions by central banks. Viewed in retrospect, equity purchases would probably be regarded as a less extreme measure than the introduction of negative key interest rates some years ago, he writes. To read his entire Reflections article, click here.
New quarterly research report: Investment Outlook
In the February issue of Investment Outlook, we predicted unexpected news and dramatic fluctuations in financial markets. This proved more correct than we would have wished. The COVID-19 crisis is having – and will continue to have – a major impact on economic growth, the functioning of economies and financial market performance, but our forecasts indicate that the unusually deep low point of the downturn is near. To read the May report and watch a 10-minute video that summarises it, click here.
Our market view
Recently stock markets have mostly fluctuated in response to changes in the news headlines about a possible vaccine against COVID-19, but reports about new stimulus measures have contributed to a continued positive undertone. The prospects of a return to a more normal situation will probably also drive market performance and undoubtedly justify the rebound in share prices that occurred after their sharp declines in March. But the scale of the rebound is a source of concern.
Because of the economic slowdown, corporate earnings forecasts for 2020 are being revised sharply lower. From expectations of earnings increases around 10% globally a couple of months ago, forecasts are now pointing to declines of more than 20%. Most observers, including us, expect earnings to regain a lot of lost ground during 2021 and probably also set the stage for earnings to continue increasing after next year. But already driving up share prices towards their earlier peaks is challenging, given the prevailing uncertainties and the sizeable dips in earnings curves we are now seeing.
We are forecasting that economic growth will rebound starting in the second half of 2020. This scenario, combined with continued low interest rates, lays a good long-term foundation for equities. The growth picture and a stabilised credit market are generating clear potential for corporate bonds. An optimistic stock market view today focuses on the brighter long-term outlook and maintains that current historically stretched share price valuations are justified by continued low interest rates and bond yields. We share this view of long-term fundamentals and see reasons for slightly higher valuations, but in the short run there are still many risks of disappointments, since the rapid upturn makes the market more sensitive to the negative news about economic growth and corporate earnings that can reasonably be expected to pop up on the radar during the coming months.
Please contact your private banker if you have any questions or concerns.