Mixed stock market performance at record levels
Swedish and American stock market indices have now climbed for five consecutive weeks, among other things due to central bank support, more stable macroeconomic data, progress in international trade negotiations and better corporate reports. The MSCI World Index in US dollars has now gained about 20% so far this year.
We have actually had three consecutive quarters of rather weak corporate reports, but market analysts still see the future as bright, since reports have been better than feared and forecasts for the coming year so far show higher earnings. Because of continued strong stock market performance, however, share valuations are being stretched even further.
Ceasefire in the trade war
Both China and the United States need a trade agreement but at the moment US President Donald Trump is probably keener on striking a deal, since he is under pressure from the impeachment process and the presidential election is only one year away. Yet it is too early to say whether the ongoing thaw is the beginning of the end of the trade war. Instead it is a ceasefire by two combatants that need to tend their wounds.
In a speech to the Economic Club of New York on November 12, Trump said that if China did not agree to US trade proposals, "we're going to substantially raise" existing tariffs and "we will only accept a deal if it's good for the United States." So the ceasefire may well not last.
Nordic Outlook: Soft landing for the world economy
Progress in resolving trade conflicts and well as Brexit (British withdrawal from the European Union), signs of stabilisation in industrial activity and especially the US Federal Reserve's key interest rate cuts have boosted confidence in the world economy, yet we foresee a deceleration in growth. In the November issue of our quarterly economic report Nordic Outlook, SEB's economists are choosing to lower their forecast of growth in global gross domestic product (GDP). We expect world economic growth to slow from just over 3.5% in 2018 to about 3% annually both this year and next. But the risks of a deep economic slump have diminished, and in 2021 global GDP growth is expected to speed up again.
Nordic Outlook forecasts that the Swedish economy will also lose momentum and that unemployment will rise during 2020. Stronger international economic conditions and a gradual recovery in Swedish residential construction will enable growth to rebound during the latter part of next year, helping unemployment to stabilise in 2021. We expect the Riksbank to hike its key interest rate to zero in December but then leave it unchanged until the end of 2021.
Read more in the press release
Read the full Nordic Outlook report (PDF)
Swedish home prices up, but expectations down
Data from Swedish estate agents (Svensk Mäklarstatistik), which are then quality-assured by Statistics Sweden (SCB), showed that the prices of tenant-owned housing units rose by 1% in October, while prices of one- or two-family houses were unchanged. Compared to one year earlier, prices had increased by about 3% for both categories of homes.
SEB's Housing Price Indicator nevertheless showed a decline in November. The most likely reasons are signals of economic deceleration and the Riksbank's announcement that it will probably hike its key rate soon. Meanwhile the indicator remains above its historical average.
Our market view
Favourable corporate reports and signs of stabilisation in macroeconomic statistics have provided continued support to stock markets. Signals from US-Chinese trade talks are also constructive, with new tariff hikes being postponed, while the Brexit issue has been pushed lower on the risk list.
Dovish signals from central banks are providing support, although after last month's rate cut the US Federal Reserve is now signalling that it will await coming economic developments. Long-term bond yields have rebounded after this year's sharp downturn, but they remain at extremely low levels. The overall outcome has been that share prices have risen for five consecutive weeks. A number of equity indices, including both the broad American S&P 500 and the narrower Swedish OMX index, reached new highs.
Recent macro statistics point to continued global deceleration. This applies especially to the US, where a continued solid labour market is helping sustain growth. In Europe, where economic expansion has slowed more sharply this year (especially in manufacturing), we are seeing signs of what may be a stabilisation in growth.
The uncertain economic situation, along with rising share prices, is stretching market valuations, suggesting more fluctuations ahead. The lack of investment alternatives (due to extremely low interest rates and bond yields) and decreased risks related to both growth and trade problems may nevertheless provide continued support to stock markets.
We have a cautious attitude towards stock markets in the near term. Better (less bad) economic statistics and corporate reports that are better than previously feared are on the plus side, but with stock market indices at or near new all-time highs there is an obvious risk that good news is already largely priced in.
This week's agenda
- Nov 13 – Swedish inflation
The inflation rate is expected to increase somewhat during the final quarter of 2019, among other things due to energy prices. Our forecast for CPIF inflation (the consumer price index excluding interest rate changes) is 1.5%.
- Nov 14 – Swedish labour market data
Labour market data for the entire period July 2018 to September 2019 will be reported when the October figures are presented. This means that the forecast will be more uncertain than usual. We believe that unemployment will be around 7%.
- Nov 15 – United States, retail sales
After a period of large upturns in US retail sales, September was a disappointment, We expect a small increase in October.
Please contact your private banker if you have any questions or concerns.