10.06.2020 10:20

Market Outlook: Macro uptick fuels stock market rally

We have seen a continued stock market rally this past week, driven by powerful stimulus measures and better than expected macroeconomic data, especially in the American labour market. The S&P 500, a broad US equity index, took a breather yesterday, but is back at around its year-end 2019 levels and is only about 5% below its February peak. The more tech-heavy Nasdaq index is at all-time highs and it looks as if the positive market trend may persist.

More stimulus packages on the way

Germany’s governing parties reached agreement on a gigantic stimulus package totalling EUR 130 billion, including a temporary cut in value-added tax, cash handouts to families with children, infrastructure and school spending, more support for digitisation and higher rebates for electric car purchases.

A potential US stimulus package totalling over USD 3 trillion has been approved by the House of Representatives but is still being mulled by Congress, amid indications that the Senate may consider a far smaller pandemic relief package but only after its mid-July recess. President Donald Trump would like to enact major infrastructure spending, a 2016 election promise that never materialised.

ECB expands asset purchase plan more than expected

To offset the impact of the COVID-19 crisis, in March the European Central Bank (ECB) launched a temporary stimulative bond-buying initiative called the Pandemic Emergency Purchase Programme (PEPP). It was worth EUR 750 billion even before last week’s ECB policy meeting, when it was expanded by no less than EUR 600 billion (the market had expected EUR 250 billion). PEPP’s end date was also extended from October 2020 until the middle of 2021. The programme, now totalling EUR 1.35 trillion, is equivalent to about 11% of euro area gross domestic product (GDP). This can be compared to SEK 300 billion in quantitative easing by Sweden’s Riksbank, corresponding to about 6% of GDP.

Surprisingly positive labour market data in the United States

The upturn in unemployment has varied from one country to another, depending on how rapidly their economies have decelerated and how relief measures such as government subsidies for short-time work are designed. In the US late last week, it came as a huge surprise to market observers that on a net basis, 2.5 million new jobs were created in May and unemployment actually fell – although a 13.3% jobless rate is still an uncomfortably high figure. This rebound awakened justifiable hopes that as lockdowns are gradually lifted, the US economy will be capable of restoring jobs.

Improvements for EM sphere, but slow recovery ahead

Because of nearly global economic lockdowns, GDP in the emerging market (EM) countries is expected to fall in 2020, which would be the first time this has happened since the Second World War. According to SEB’s latest Emerging Markets Explorer report, a brighter mood will lift EM assets in the coming months, but there is a risk of at least temporary setback this coming autumn.

Read Emerging Markets Explorer, June 2020 (40 pages)

Extended production cuts will prop up oil prices

This past weekend, OPEC+ (the OPEC oil cartel plus Russia and several other countries) reached agreement on a one-month extension of their earlier production cut of 9.7 million barrels per day (about 10% of global supply) until the end of July. Due to changes in demand and sharply lower production, Brent crude oil prices have climbed by more than 100% since their April 21 low to over USD 40/barrel. The production cuts will potentially be further extended into August, while global oil demand should increase. Brent oil prices are thus likely to climb towards USD 50.

Reflections: Can we dare to believe that tourism will bounce back?

Around Europe, many people are planning a summer holiday without foreign travel. In the latest Reflections, SEB’s Chief Strategist Johan Javeus examines the future of the hospitality industry. Tourism has been hard hit by the pandemic, and many observers doubt that it will return to the same levels as before the coronavirus hit. But more and more people around the world are becoming financially able to travel, and tourism is important to many countries and individuals. This suggests that tourism will bounce back, perhaps even faster than most of us think.
Read Reflections

Our market view

More positive macroeconomic figures, along with new stimulus packages, helped drive last week’s stock market performance. Investors are apparently expecting a V-shaped recovery after the economic downturn and are assuming that current positive signals will turn into a more lasting trend. Together with continued extremely low interest rates and bond yields, this may justify today’s historically rather high share price valuations and thus the recent upturns. 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 of at least 10% globally a couple of months ago, forecasts are now pointing to declines of around 25%. Most observers, including us, expect earnings to regain lost ground during 2021, probably also setting the stage for earnings to continue increasing after next year. If the reopening trend and stimulus measures continue to dominate the growth picture, earnings are likely to increase substantially in the future – which is probably necessary in order to justify further stock market upturns based on fundamental arguments.

We are now seeing news headlines that confirm and even reinforce forecasts that economic growth will take off again ahead, which underscores the “TINA” (There Is No Alternative) argument. It is clear that central banks will continue working to keep interest rates very low, resulting in low or non-existent returns on risk-free investments. This makes investors reluctant to sell equities, given the lack of alternatives. As long as current headlines on continued stimulus measures and promising signs about reopening economies persist, the positive stock market trend can continue. But rapid and sharp upturns also increase the probability of downward corrections, and given already positive market expectations, negative news may lead to stock market disappointments ahead.

Please contact your private banker if you have any questions or concerns.