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Market Outlook: A focus on central banks

Last week financial markets were dominated by large bond yield and interest rate upturns in both the United States and Europe. In stock markets, Sweden’s All-Share Index (OMXSPI) recorded an upturn of 0.1% between January 28 and February 4 while America’s broad S&P 500 index rose by 1.5%, but the Stoxx Europe 600 fell by 0.7%. In fixed income markets, 10-year US Treasury yields soared from around 1.78% to nearly 1.92% last week. On February 8 they were at or above 1.95%.

The United States

American inflation figures for January

On January 10 (Thursday) US inflation figures for January will be released. We agree with the market consensus that inflation will remain high, with clear new increases in the year-on-year figures for both core inflation and the consumer price index (CPI).

The Nordic countries

Riksbank monetary policy announcement

On January 10 Sweden’s central bank will also make its policy announcement, amid rising pressures after the European Central Bank’s somewhat hawkish press conference last Thursday. We now believe there is essentially an equal chance that the Riksbank will revise its rate path upward or leave its monetary policy unchanged. The risk of a major revision has also increased, compared to a few weeks ago.



New Investment Outlook out

High inflation is putting pressure on central banks to tighten their monetary stance and hike key interest rates faster than expected, but their policies will remain stimulative for some time to come. Economic growth will slow, but from high levels. A tug-of-war between opposing trends will lead to greater volatility, despite continued good fundamentals. Read more in the latest issue of our quarterly Investment Outlook report, which was published on February 8
Read more on seb.se/investmentoutlookreport


Our market view

Worries pushing down equities

As the first 2022 issue of Investment Outlook explains, we expect the stock market year to be dominated by volatility rather than show a clear direction – after one of the weakest January performances we have seen in recent decades. A downturn after last year's sharp and almost completely uninterrupted rally, including an extra surge in December, is not so surprising. Corrections occur at irregular intervals. If we compare today's share prices with those of exactly one year ago, most of the world’s stock markets are still well on the plus side, with upturns of around 15-20%.

Virus transmission, geopolitics and inflation are negatively affecting the stock market mood

Although the downturn is natural in itself, the reasons why uncertainty has increased are important to take into account. Today’s primary sources of concern are high inflation and its impact on the actions of central banks − especially the US Federal Reserve (Fed) – as well as the global growth outlook.

Key issues for the stock markets right now are inflation and the monetary policy changes signalled by the US Federal Reserve. Consumer price inflation has risen to its highest levels for decades − in the US currently around 7% and in Sweden just over 4%. Much of this is explained by more or less temporary effects, such as rising energy prices. But even if we look at “core” inflation, it is troublingly high. To some extent, this can be explained by the rapid reopening of economies last year.

We and most other analysts expect the inflation rate to fall back this year. But forecasts for underlying inflation have been raised, even a bit further into the future. Most central banks have an inflation target. According to current forecasts, inflation will be at or above their targets, creating upward pressure on low key interest rates. As a result, the Fed in particular is now in the process of ending its stimulative bond purchases and is instead considering withdrawing liquidity from the market, something that normally adds to volatility.

Aside from leading to higher interest rates and yields, there is an obvious risk that high inflation may also dampen private consumption and thereby hold down demand in the economy. Many analysts are now adjusting their growth forecasts downward a bit, so far not dramatically, but this still adds to the risk picture.

Good underlying growth, in spite of everything

The above account may sound pessimistic about the stock market outlook, and there is no question that headwinds and risks have increased. As a consequence, we have also gradually reduced the level of risk in the portfolios we manage. But we still have some overweight in risk assets such as equities. This reflects the fact that underlying growth is good, in spite of everything, and that rates and yields remain low.

At the global level, this year’s economic growth rate will again be above the historical average. We expect relatively healthy growth next year as well. Looking at global corporate earnings, the market's average forecast points to growth of 5-10% this year as well as in 2023 – a reasonable level that will help sustain share prices.

Central bank interest rate hikes are concerning but for stock markets, long-term bond yields are often more important. We expect yields to climb somewhat, but at a relatively slow pace and not to levels that will necessarily cause serious disruption to the stock market outlook, unless they turn out to be more dramatic than we are forecasting.

Because of less favourable conditions, we do not believe that last year’s strongly positive trend can be repeated. We expect stock markets to show some volatility for another while. Declines often give rise to a period of adjustment and risk management. Further declines in the near future cannot be ruled out. But our still fundamentally optimistic outlook should provide support for share prices. As the news headlines shift in a slightly more positive direction and the temporary effects of the Omicron variant and inflation dwindle, there is a chance of decent returns once the dust settles.