16.10.2019 14:40

Market Outlook: Trade agreement leads to temporary relief rally

• Progress at last in US-Chinese trade talks
• Report season is taking off, with low expectations
• Temporary Federal Reserve support
• Bye bye Britain? Brexit saga lurching towards another extension
• NIER: Sweden's economic boom is over
• Continued low Swedish inflation
• New EM report from SEB: Resilient markets despite headwinds

Global stock markets, as measured by the MSCI All Country World Index, rose 3.3% in US dollars and 1.9% in Swedish kronor during the past week. Progress in trade talks between the United States and China was a major relief. Meanwhile the stock market is struggling with weakening economic conditions and political conflicts on multiple fronts.

Progress at last in US-Chinese trade talks
Part 1 of an agreement was reached during the past week. It is not a complete trade pact, but a step in the right direction towards calming down the "trade war". As US President Donald Trump put it: "There was a lot of friction between the US and China and now it's a lovefest." Wise from earlier reversals, the Chinese would only say that "substantial progress" has been made. Under the agreement, China will increase its purchases of US farm products by USD 40-50 billion, set guidelines for how Chinese yuan (CNY) exchange rates will be governed and strengthen intellectual property rules. In exchange, the US will postpone tariff hikes from 25 to 30% on USD 250 billion worth of Chinese goods that were scheduled for October 15.

This half-solution to the trade war is hardly likely to save the stock markets. At present, economic performance, central banks and corporate earnings are more important than trade negotiations and Brexit.

Report season is taking off, with low expectations
Analysts have continued to revise earnings expectations downward ahead of third quarter corporate reports. The report season that is now taking off will run until mid-November. On October 15, major US banks JPMorgan Chase and Citigroup topped expectations while Goldman Sachs and Wells Fargo fell short. The market foresees about 3% average lower quarterly earnings for companies in America's broad S&P 500 index, compared to Q3 2018.

Temporary Federal Reserve support
Federal Reserve Chairman Jerome Powell announced that the Fed will begin buying Treasury bills for market stabilisation purposes – in order to alleviate end-of-quarter and end-of-month liquidity shortages. However, he was careful to emphasise that this should not be regarded as a new round of quantitative easing (where the central bank bought bonds to stimulate the market and the economy). In practice, the Fed will be supplying about USD 60 billion a month in extra liquidity to the banking system for at least six months. Powell also hinted at another key interest rate cut, which the market already expects to happen in late October, although our forecast is that such a cut will instead occur in December.

Bye bye Britain? Brexit saga lurching towards another extension
Despite discussions with Ireland about the border issue, there is a major risk that the United Kingdom will not have a Brexit agreement with the European Union in place by the October 17-18 EU summit. The British Parliament will hold an extra session on October 19, "Super Saturday". We believe UK Prime Minister Boris Johnson will be forced to request an extension of British withdrawal from the EU, which is scheduled for October 31.

NIER: Sweden's economic boom is over
As early as August, the National Institute of Economic Research lowered its forecast of gross domestic product (GDP) growth in Sweden. The NIER's October analysis of the economic situation states that the Swedish economy "is in a clear slowdown phase". International trade disputes and Brexit are weighing on the global economy and thus on Swedish exports, while unemployment will rise and inflation will remain well below the Riksbank's 2% target.
Summary and full report

Continued low Swedish inflation
Swedish inflation expectations – 1.7%, according to the latest Prospera survey – are marginally above previous lows, which occurred right after the financial crisis. The actual September inflation outcome of 1.5% (using CPIF, the consumer price index less interest rate changes) was somewhat higher than expected, but it is unclear whether this is enough to persuade the Riksbank not to revise its rate path downward at the next policy meeting.

New EM report from SEB: Resilient markets despite headwinds
The latest issue of SEB´s semi-annual overview of emerging markets shows that the outlook for the emerging market (EM countries) is challenging and risks abound. But growth appears to be stabilising and most countries will avoid the economic impact of the occasionally heated exchanges of views between the US and China. Although risk appetite is weak, EM economies are attractive.
Read the full report (pdf)


Our market view


Storm clouds justify cautious risk-taking
Despite political turmoil and uncertainty about economic growth, stock markets are showing resilience. Equity indices in several major markets are now close to earlier highs, while corporate earnings forecasts for 2019 have continued to be adjusted downward. Dovish signals from central banks are providing support, while long-term bond yields have largely continued their downward trend, though with extensive fluctuations. On the trade front, a tactical game continues; cautiously positive signals have recently dominated, but we are unlikely to see any quick solutions.

The uncertain economic situation, along with stock markets at high levels, suggests more fluctuations ahead – especially because the Brexit drama will escalate towards the end of October, in a Europe shaken by weak economic statistics. Because of continued extremely low bond yields and interest rates, the lack of alternatives to equities is striking. Meanwhile credit spreads (the gap between government and corporate bond yields) are being squeezed by the search for returns, combined with renewed central bank stimulus measures. We have a cautious attitude towards stock markets in the near term while awaiting the approaching third quarter corporate report season.

This week's agenda
• Oct 16 – Retail sales in the United States, which are expected to have increased by 0.3% in September, a decent level.
• Oct 17 – A dramatic weakening in job growth over the past three months has created the weakest Swedish labour market since the financial crisis, yet our forecast of September unemployment in Sweden is a seasonally adjusted decline to 7.0%.