Economies are reopening in small steps
The process of reopening economies is continuing. In southern Europe, more shops and restaurants will now be allowed to open. In the United Kingdom, manufacturing and construction workers are being "actively encouraged" to return to their workplaces, while outdoor activities and exercise will be more widely permitted. Many things will remain closed in the UK, however, and plans to reopen shops and restaurants are expected to extend over the coming weeks or months.
Germany and Sweden's Nordic neighbours are also gradually reopening various types of businesses and activities. In terms of COVID-19 deaths, Sweden is somewhere between southern European countries and the other Nordics. Since Sweden has not used lockdowns to the same extent as other economies, the focus of attention is still more on measures to support the affected businesses, employees and institutions.
Stock market more optimistic than fixed income market
New coronavirus outbreaks in South Korea and China, as well as increased infection figures in Germany, are showing that the path to a normal situation will be long. We are also seeing extremely gloomy jobless figures in the United States (23 million unemployed in April). In spite of this, the stock market remains optimistic, perhaps buoyed by speculations about new US federal stimulus packages, as well as signals of diminishing US-Chinese trade conflicts.
The Q1 2020 corporate report season turned out better than feared. The stock market is apparently more upbeat about the situation than fixed income markets, which have seen US two- and five-year Treasury yields fall to record-low levels. For a look at global yields on government bonds, click here. The US Federal Reserve also sounds pessimistic; San Francisco Fed President Mary Daly said she does not expect any American economic recovery until next year.
New SEB research report: Nordic Outlook
The COVID-19 pandemic has brought the world economy to an unprecedented halt. Record-sized government and central bank stimulus measures will help ease the pain, but cannot prevent the downturn. This autumn, unemployment may climb to levels not seen since the 1930s. According to the main scenario in SEB's new Nordic Outlook forecast, gross domestic product (GDP) in the developed countries will shrink by 7 per cent in 2020, followed by an upturn of 5 per cent in 2021.
Despite a more V-shaped recovery than in comparable historical crises, the GDP level at the end of next year will be well below earlier forecasts − about 5 percentage points lower in the 37-country Organisation for Economic Cooperation and Development (OECD) − and unemployment will be far higher. Sweden's relatively gentle lockdown strategy will limit the downturn in its economy compared to the other Nordic countries, but the nearly 7 per cent drop in GDP we expect this year is still the largest in modern times. Meanwhile, unemployment in Sweden may climb to a record-high 14 per cent. You can read Nordic Outlook by clicking here.
COVID-19: the end of globalisation and the EU?
In this think piece, SEB's Chief Strategist Johan Javeus reflects on globalisation. We travel a lot, which contributed to the rapid spread of the virus. Many companies have had geographically far-flung production, making them sensitive to disruptions.
Despite its major impact on society, the coronavirus will hardly succeed in reversing these long-term trends.
Riksbank key interest rate cut will have to wait
The minutes of the latest Riksbank policy meeting confirmed the impression that although the Executive Board is not ruling out a future cut in the repo rate, now at 0%, it will have to wait. Board members also raised the prospect that the Swedish central bank might buy corporate bonds.
Our market view
Stock markets have recently moved higher, but with sizeable fluctuations. Weak incoming economic data, worries about new coronavirus outbreaks and political quarrels are offsetting hopes of a return to more open, functioning economies – supported by aggressive stimulus measures from central banks, governments and others. Mixed reports about the spread of the virus and the pace of reopening after lockdowns are contributing to continued stock market volatility. Although there are still large fluctuations, we are seeing signs of market stabilisation.
The return to a more normal situation will probably drive the coming recovery. This undoubtedly justifies a rebound in share prices from their sharp declines during March. But the scale of this 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.
Decent growth prospects on the other side of the crisis, along with continued low interest rates, are laying a good long-term foundation for equities. The credit market has stabilised, which will generate potential for corporate bonds. An optimistic 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.