Stock market defies coronavirus by setting new records
After a sharp initial decline for Chinese equities when financial markets re-opened in China after the Lunar New Year holiday, stock exchanges recovered last week. Although the impact of the Wuhan coronavirus on the economy is unclear, American exchanges climbed to new record levels. The broad S&P 500 equity index has now gained 3.2% so far in 2020 and China's CSI 300 has recovered to minus 4.8%, while the MSCI All Country World index as a whole has climbed 1.5%, all calculated in local currencies. Stockholm's OMXS30 index also broke new records during trading on February 11.
Temporary slump in economic growth
From a growth perspective, we are sticking to our relatively optimistic global scenario for 2020-2021, but we foresee the risk of a temporary China-related slump during the next 1-2 quarters. Although Chinese financial markets re-opened after the Lunar New Year holiday, many large companies in China remain completely or partly closed, in an effort to reduce the spread of the virus; e-commerce groups Alibaba and Meituan have extended their holiday until February 16. After first focusing on the mortality rate of the virus (still around 2-3%), news reports have shifted towards how fast it is spreading and when this process may conceivably decelerate. Current figures can be found on the World Health Organisation's website https://www.who.int/
Strong American labour market
The latest monthly labour market report for the United States is another important reason for continued stock market optimism. US job growth again surprised on the upside, and the influx of new workers is helping keep pay increases moderate. Since the Federal Reserve is also signalling that it is comfortable if US inflation climbs, Fed key interest rate cuts seem more likely than rate hikes.
A Valentine's Day present from China
News headlines about the US-Chinese trade conflict have become smaller since the two countries signed a "Phase 1" agreement in January and continued negotiations aim at a Phase 2 pact. China's President Xi Jinping and US President Donald Trump recently discussed the coronavirus outbreak by telephone, emphasising their commitment to the terms of the Phase 1 trade agreement. Meanwhile China announced that it will halve its tariffs on about USD 75 billion worth of imports from the US, starting on February 14.
Trump acquitted as expected – no clear election opponent
The US Senate acquitted President Trump of the two impeachment charges – abuse of power and obstruction of Congress – with Mitt Romney as the only Republican to defy the party line by voting to convict. As predicted, the market impact was largely non-existent, while there are divergent opinions as to whether Trump's acquittal will strengthen him ahead of the November 3 election. The Democrats have begun their primary elections to choose a presidential candidate, but there is no clear frontrunner yet. Pete Buttigieg and Bernie Sanders topped the Iowa caucuses. In yesterday's New Hampshire primary, Bernie Sanders won 26% of the Democratic votes and Pete Buttigieg picked up 24%. Amy Klobuchar came in third at 20%. The next primaries take place in Nevada on February 22 and South Carolina on February 29.
Will the winter storm blow away Swedish inflation?
CPIF inflation (the consumer price index minus interest rate changes) is expected to slow from 1.7% in December to 1.4% in January and perhaps even drop below 1% towards the summer. A warm, wet winter – combined with restrained oil prices – is the reason for the downward revision of inflation forecasts. This past week there were even reports of temporarily negative Swedish spot electricity prices, as winter storm Ciara sent wind turbines whirling while water levels made hydropower plentiful. Because of the warm weather, some clothing and sporting supply stores will need to sell off their excess inventories at discounts.
Higher home prices in both Norway and Sweden
Home prices in Norway usually climb in January. The increase was more than expected: 3.3% since December. For 2019 as a whole, Norwegian home prices rose about 2.6%. Norges Bank forecasts a similar trend in 2020.
According to Svensk Mäklarstatistik, based on figures reported by estate agents, prices of tenant-owner units in Sweden rose 1% month-on-month while prices of single-family homes were unchanged. SEB's Housing Price Indicator moved higher in February, with 53% of households now expecting that prices will rise.
Lower oil price forecast
Geopolitical risk factors have increased during the past year, including drone attacks on Saudi Arabian oil processing facilities in September and the killing of Iranian general Qassim Sulemani by the US in early January. Right now, however, a more pressing matter is how much the coronavirus outbreak will affect global oil demand. The OPEC oil cartel has said it is ready to trim supplies, but Russia is reluctant. At their meeting last week, the "OPEC+" countries (including Russia) made no decisions on limiting production, and the group's next planned meeting will not occur until late March. Based on recent developments, we have adjusted our oil price forecasts to USD 60/barrel (Brent crude) in 2020 and USD 65 in 2021.
Our market view
The ongoing coronavirus epidemic is generating uncertainty. So far, market price movements have been fairly limited; most investors seem to expect the impact on growth and earnings to be manageable and expect any slump in the first quarter of 2020 to be temporary. Depending on the spread of the virus in the coming weeks and months, there is an obvious risk that the impact will be larger, especially on share prices. At present, however, we still believe that we can eventually shift our main focus of attention towards more traditional economic and market drivers. However, there is a risk that things will get worse before they get better.
Last week's strong American labour market data are among the factors pointing to an extended period of low interest rates and bond yields. A combination of relatively healthy economic growth and ultra-low rates/yields should provide the basis for a favourable stock market climate.
The problem is that after last year's sharp upturns, stock markets have already priced in a lot of this optimistic scenario. Equity valuations are at or near historical peaks, but low bond yields and interest rates also justify higher valuations, if our scenario of decent growth persists. Share prices may thus climb a bit further in this scenario. But given stretched valuations, upside potential is still limited, as is the market's resilience to negative news.
Looking at the ongoing corporate report season, fourth quarter 2019 earnings look set to end up a bit above the prevailing low expectations. If the trend holds, this will also provide support to share prices.
This week's agenda
- February 12 – Riksbank meeting – The Swedish central bank's first policy meeting of 2020 is expected to be a non-event. Our forecast is that the Riksbank will leave both its key interest rate and the future rate path unchanged. Falling inflation may put pressure on the Executive Board to act, although the forces underlying this trend may be regarded as mainly temporary. When the Riksbank raised its repo rate to zero in December, it signalled an unchanged key rate at least until mid-2022.
Please contact your private banker if you have any questions or concerns.