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Market Outlook: Continued focus on geopolitics

Last week was gloomy in the world’s stock markets. Between February 11 and 18, Sweden’s All-Share Index (OMXSPI) lost 4.9%. In the United States, the S&P 500 index fell by 1.6%. The Stoxx Europe 600 was down by 1.9% There was some movement in the fixed income market as well. Ten-year US Treasury yields, which peaked at above 2% early last week, had dropped to around 1.93% by February 22. Brent crude oil continued upward and is now trading at about USD 97 per barrel.

The world

The Ukraine crisis continues to dominate

On February 21, President Vladimir Putin recognised the pro-Russian separatist regions of Luhansk and Donetsk in eastern Ukraine as independent states and then ordered that Russian troops be sent to separatist-controlled areas. At present it is unclear what this will mean and when this operation will unfold. The US and other Western countries have condemned these actions and will shortly impose sanctions on Russia.

Flash purchasing managers’ indices released

This week preliminary PMIs in both the US and Europe are being published. It remains to be seen whether the loosening of COVID-19 pandemic-related restrictions has affected economic growth, while it will be interesting to learn whether global supply chain pressures have begun to ease.

The Nordic countries

Swedish home prices rose in January

According to Valueguard’s HOX index, home prices rose by 2.7% in January compared to the previous month and by 10.5% year-on-year. The seasonally adjusted month-on-month figure was 0.6%, or somewhat higher than the historical average.

Our market view

Putin depresses market sentiment

Events in Ukraine, with their sad humanitarian aspects, are having a negative impact on financial markets. The escalation of the conflict and the threat of further military action have contributed to recent sharp declines in the world's stock markets.

President Vladimir Putin’s decision on February 21 to recognise the two breakaway regions of Donetsk and Luhansk in eastern Ukraine as independent states has further fuelled market worries. The United States, the European Union and the United Kingdom are now expected to respond shortly with various sanctions against Russia. Further escalation of the conflict would continue to dampen investor sentiment, among other things due to expected higher energy prices.

Persistent inflation

Although the Ukraine-Russia conflict currently dominates the headlines, there is a further and larger source of financial market concern. Over the past year, inflation has risen sharply in many countries. This raises questions about how it will impact the actions of central banks, especially the US Federal Reserve (Fed) in the US, but also how central bank actions will then affect the global economic growth picture. Consumer price inflation has risen to its highest levels for decades − in the US currently around 7% and in Sweden 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 during 2022. 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 this year and next will be at or above their targets, putting pressure on central banks to hike their key interest rates from today’s low levels. As a result, the Fed in particular is now in the process of preparing a rate hike and ending stimulative bond purchases and is instead considering withdrawing liquidity from the market, something that normally adds to volatility.

Sweden’s Riksbank recently announced that it is maintaining its forecast of an initial rate hike in 2024, but we expect a rate adjustment as early as February 2023. 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

Because of inflationary pressures and geopolitical developments, stock markets will face more intensive headwinds and risks − at least in the near future. But these events are being offset by several positive factors. 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% in 2022 and the same in 2023 – a reasonable level that will help sustain share prices.

Planned 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 so high as to necessarily cause serious disruption to the stock market outlook, unless the upturns prove to be more dramatic than we are forecasting.

Due to less favourable conditions, last year's strongly positive trend has been challenged in early 2022. We expect stock markets to be under some pressure for a while. Declines often give rise to a period of adjustment and risk management. Further near-term declines cannot be ruled out. But our still fundamentally optimistic outlook should provide support for share prices. As news headlines hopefully shift in a slightly more positive direction and as inflation dwindles, there is a chance of decent returns once the dust settles.