Economic Outlook May 2014

Euro zone monetary stimuli as expected, but the recent military violence in Iraq is worrying.

May was a strong month for global equity markets with MSCI World performing 2.34%, MSCI North America up 2.2%, MSCI Europe 2.31% and the MSCI Nordic Countries returning 3.21% in local currencies. The broad based positive market sentiment comes in the back of relatively strong corporate results for the first quarter and on aggregate strong economic news across the globe. A consequence is also a falling risk premium and a very low volatility. The strong stock market has led to higher valuation, and further up-swing is dependent on stronger corporate earnings going forward.

In the US the single most important economic figure is the non-farm payroll. It came in at 288,000 for April, well above the expected 214,000. The strong trend from April was confirmed by the stronger than expected figures for May released earlier this month. Furthermore, both ISM and PMI showed high levels, and manufacturing as well as services came in ahead or on expectations. This is a strong indication for US GDP growth in the second quarter, after a very weak first quarter of 0.1% annualized. Global investors are currently turning their backs on Feds tapering program and other negative news, keeping full focus on economic numbers and its implication for corporate results going forward. Tapering of USD 10bn continued as expected. SEB still expects the first rate hike in Q3 2015.

In Europe the picture is more mixed. Euroland GDP for the first quarter disappointed and came in at a weak 0.2%. This is contrarian to other figurers which indicate firmer growth. Especially France and Netherland look weak. In France economic reforms are essential for the country’s ability to return to long term economic growth. On the positive note, conditions look healthier in Germany and the southern parts of the continent. The GIIPS countries (Greece, Ireland, Italy, Portugal, and Spain) have increased their productivity and their competitiveness over the last couple of years as such. One can, however, expect some disturbances due to the ongoing conflict with Russia. Europe’s dependence on energy import from its huge neighbor in the east, and a potential cut-off in energy supply will have a huge impact.That said, we expect the countries with borders to Russia to be most affected by the ongoing political game. Only 3% of the German export goes to Russia, for Latvia and Finland the share is 19% and 9.5%, respectively. The parliamentary election in EU was a cold shower for most of the ruling parties throughout Europe. In many countries voters are clearly dissatisfied with the incumbent leadership as right wing parties made large gains in France, Denmark, UK, Sweden, Finland, Holland and Austria. As widely expected the ECB eased the monetary conditions. ECB cut the key rate by 0.10% to ultra-low 0.15%. In addition the interest rate banks will receive on deposits was decreased to -0.10% from 0.10%.

The economic deceleration trend we saw in China in Q4 2013 continued into 2014.  GDP in Q1 2014 came in at 7.4% (yoy, annualized), down 0.3% sequentially. The central government is changing the focus from being the manufacturing hub of the world towards a more consumption driven economy. This should lead to lower long term growth than China has experienced over the last couple of decades. The central government is well aware of this, and has the tools needed if growth falls short of expectations around 7-7.5% pa.

In Ukraine the presidential election took place on the 25th of May. Petro Prosjenko won the first round with as much as 54% of the votes. Hence, no second vote was needed. This calmed the financial markets, and stock markets rose and government bond yields fell. Even though Russia and Putin have made themselves unpopular in most western capitals, they cashed in one big victory in May; after more than 10 years of negotiations Russia finally managed to sign an export of gas agreement with China. China probably held the strong hand, but the deal is expected to be worth about USD 400bn and last for 30 years. This is crucial for Russia who is very dependent on other receivers than Europe for its energy exports. It also proves that there is an improved political relationship between the two mighty countries. Tensions between Russia and the west calmed down as Russia met unofficially (it was excluded from the official meeting) with western leaders in the recent G-7. The Russian stock market surged 11.6% in May, though after a very steep fall earlier this year and during 2013 as such.. In India the stock markets gained 6.7% in May. The convincing victory for the BJP in the election has been the catalyst for the positive stock market reaction.

As the Ukraine crises seem to somewhat cool down, other events that may have an impact on investor sentiment has occurred. In recent days the ultra-conservative, ISIL, has taken control in two major cities in Iraq.  What impact this will have is too early to say. It does, however, prove that events which are impossible to foresee will occur and they can be the back bone to a market correction.  However, crude prices have already jumped some USD 5/bl due to the further destabilization in an already violent region: The Middle East.