Economic Outlook March 2016

Investors’ risk appetite continued in March and all major indexes rose

Investors’ risk appetite continued in March and all major indexes rose. The US was the best performing market in March, and S&P 500 climbed 6.80 per cent. Japan’s Nikkei 225 managed 4.30 per cent while the broad Bloomberg European 500 and Oslo Stock Exchanged gained 1.3 and 0.90% respectively. Some of the reason for the strong US performance can be explained by the almost 4.7 per cent depreciation of the US dollar against the euro in March. The Norwegian currency also gained close to 5 per cent against the US dollar. The oil price rose more than 8 per cent.

The strong market was supported by most major central banks. First out was Mario Draghi and the European Central Bank (ECB). Increase in the Quantitative Easing (QE) program was expected, but Mr. Draghi managed to exceed expectations. The bank cut the deposit rate to -0.40 per cent, and increased the QE program to EUR 80 million per month from the previous EUR 60 million. The ECB will also open up a new targeted long-term refinancing operation for banks starting in June. The message was welcomed by investors, and credit spreads narrowed.

On March 15 the Bank of Japan did not do any policy changes, but further measures are to be expected as the yen has appreciated close to 6 per cent in 2016, and inflation is well below target.

The Central Bank of Norway reduced as expected its key interest rate on March 17 to 0.5 per cent. SEB predict another rate cut down to 0.25 per cent in September. The Swiss and British central banks both left their interest rates unchanged.

Investors concern about Federal Reserve’s aggressiveness to hike rates was refuted at the Feds March meeting. The bank chose to lower their forecast of 2016 rate hikes form four to two. This way Mrs. Yellen proves that she and the majority of the members in the Federal Open Market Committee are considering international macro conditions and investor sentiment in their policy decisions. SEB expects that the next Fed hike will be in September.

After a very negative start of 2016, that market has rebounded. In the short term we are cautious with our risk utilisation, but there are encouraging signs. Global manufacturing data have been weak for a while. It is too early to tell, but lately there has been some proof of sounder developments. We will follow the trend closely, and adjust risk accordingly.

By Hans Kristian Hals, Head of Investment Strategy