30.10.2019 23:03

Market Outlook: The Riksbank’s Christmas present will be an interest rate hike to zero

Stock markets keep setting records
Stock markets rose for the third consecutive week, and third quarter corporate reports continue to look better than previously feared. Global equities, as measured by the MSCI World Index in US dollars, have now gained about 17% so far this year. Both Sweden's OMXS30 and the broad American S&P 500 index have reached new all-time highs since the October upturn began. Aside from corporate earnings, this week's market focus is on the US Federal Reserve's expected key interest rate cut on October 30.

Constructive trade talks
The market was also pleased with the positive signals coming from the trade negotiations between the United States and China. The talks are making progress, although for the time being they are mostly about China buying more US farm products, while the US will lower or remove previously announced tariff hikes.

Swan song for negative Swedish key interest rate
Sweden's Riksbank would like to leave behind its negative repo rate, but after that the central bank does not plan to touch the key rate for a few years. This was the message from last week's policy announcement. The key rate was left unchanged in October, but the Riksbank clearly signalled that it will be hiked back to zero at its next meeting on December 19. We have thus updated our exchange rate forecasts and now expect the krona to reach about 10.50 per euro by year-end and 10.20 at the end of 2020.
The Riksbank's press release also stated that global growth is decelerating, the economic situation in the euro area is worsening and the Swedish economy is also slowing a bit faster than expected, but the central bank's conclusion is that this is not a matter of a recession − either in Sweden or internationally.

Unchanged key rates in Norway and the euro area
As expected, Norges Bank left its key interest rate unchanged at last week's policy meeting, having already raised it four times in the past year to 1.5%. We now expect an unchanged Norwegian key rate going forward. The European Central Bank (ECB) also left its key rate unchanged. Meanwhile after eight years Mario Draghi is handing over the ECB presidency to Christine Lagarde, former head of the International Monetary Fund. For the time being, we are sticking to our forecast that the ECB will deliver another slight rate cut next spring.

Third time's the charm for Brexit?
Last week the British Parliament approved the newly renegotiated Brexit agreement between the United Kingdom and the European Union, but rejected the timetable for approving the full package of legislation accompanying it. With EU approval, the date for withdrawal will now have been postponed three times – from March 2019 to January 31, 2020. Late last night it became clear that there will be a new parliamentary election in the UK on December 12 based on a government proposal initiated by Prime Minister Boris Johnson ("BoJo"), in order to try to achieve a majority in Parliament. The outcome feels incredibly uncertain and our fear is that the election will not succeed in creating a clear majority, which means that the deadlock on the Brexit issue will remain even after the election. Regardless, in practice there will be no immediate major changes in UK-EU relations, since even if there is an agreement that the UK will leave the EU earlier or on January 31, there is also a transition period that is currently scheduled to run until December 2020.

Our market view

Favourable corporate reports have helped sustain stock markets. Current signals from US-Chinese trade talks are constructive, with new tariff hikes being postponed, while negotiations on UK withdrawal from the EU are pointing towards decreased risk of a hard (no-deal) Brexit.

Dovish signals from central banks are providing support, while long-term bond yields have largely continued their downward trend, though with extensive fluctuations. The overall outcome has been rising share prices for three consecutive weeks, and both the broad American S&P 500 index and the narrower Swedish OMX index have touched new peak levels.

However we are seeing continued signals of deceleration in the real economy. Meanwhile European statistics are pointing to a weak growth picture. Germany must be regarded as technically in a recession.

The uncertain economic situation, along with rising share prices, is stretching market valuations, suggesting more fluctuations ahead. The political arena is also likely to contribute to market uncertainty. The US-Chinese trade conflict includes several remaining complex problems and the Brexit process (early election and/or new referendum) is far from over.

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 continued cautious attitude towards stock markets in the near term, while awaiting further third quarter corporate reports. The reports that have been published so far must be regarded as better than previously feared, but with stock market indices at or near all-time highs there is an obvious risk that good news is already largely priced in.

This week's agenda

  • Oct 28-31 – Plenary session, Chinese Communist Party Central Committee
    The focus of the meeting will probably be on how to ensure control over economic developments, which will not make China's discussions with the US any easier, since the Americans want less central government control of the Chinese economy.
  • Oct 30 – US GDP for Q3
    The growth in American gross domestic product (GDP) during the third quarter (Q3) is expected to have decelerated to 1.5%. Our forecast of full-year 2019 growth is 2.3%, slowing to 1.8% in 2020.
  • Oct 30 − Federal Reserve policy meeting
    The US central bank is expected to cut its key interest rate by 25 percentage points, as it did in July and September. We are reiterating our forecast of a further rate cut early in 2020.
  • Nov 1 − US labour market data
    We believe US job growth will decelerate towards year-end, but remains high enough to extend the long-term downward trend in unemployment, which is expected to have totalled around 3.6% in October.

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