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Market Outlook: Energy crisis is contributing to uncertainty in financial markets

  • ECB policy announcement on Thursday
  • EU Energy Council emergency meeting
  • Important Swedish macro statistics this week

Another downbeat stock market week ended last Friday with Gazprom’s announcement that it was extending its shutdown of the Nord Stream 1 gas pipeline from Russia to Germany indefinitely. Between August 26 and September 2, America’s broad S&P 500 equity index lost 3.3% while the Stoxx Europe 600 fell by 2.4%. Sweden’s All-Share Index (OMXSPI) ended the week down by 1.5% and continued to lose ground on September 5 and 6. US financial markets were closed for Labor Day on Monday.

In the fixed income market, 10-year US Treasury yields fell by a few basis points on Friday but have now rebounded and have been trading at close to 3.35%. Remarkably, Swedish 2-year government bond yields have climbed above 2.17%, a level last achieved in 2011.

ECB policy announcement on Thursday

One of the main events this week for market analysts will be the European Central Bank’s monetary policy announcement on September 8. The ECB surprised observers at its previous meeting by hiking the key interest rate by 50 basis points. Tomorrow the door is wide open for a triple rate hike (75 bps), even though this may cause several euro area countries – among them Italy – to experience financial market distress over the next few months.

Other central banks making policy announcements this week include the Reserve Bank of Australia – which hiked its key rate by 50 bps yesterday more or less as expected – and the Bank of Canada, which announces its interest rate decision later today (Wednesday).

EU Energy Council emergency meeting

This Friday the European Union’s energy ministers will gather in Brussels for an extraordinary meeting to discuss the European energy crisis. On their agenda will be such measures as electricity price caps, windfall taxes on profits of electrical utilities or even rationing. Their meeting will undoubtedly be interesting to follow.

Important Swedish macro statistics this week

In Sweden a lot of macroeconomic statistics are being published this week, such as housing market statistics from estate agents (Svensk Mäklarstatistik), construction output, household consumption and industrial production. Swedes will vote at national, regional and local levels this coming Sunday, but it is unclear whether the latest macro figures will influence the election outcome.

Our market view

A miserable first half of 2022 in stock markets was followed by a rebound at the height of summer, while the past few weeks have brought renewed stock market turmoil.

In itself, it was not unreasonable that share prices climbed in July after falling by 20-30% since the beginning of the year. But this upturn was accompanied by continued discouraging signals about the global economic situation, especially in terms of growth.

There is certainly no shortage of worries at the moment. Growth forecasts are being revised sharply lower, and this is likely to continue for some time. Persistent inflation is forcing central banks to hike their key interest rates at an unusually rapid pace, while eroding household purchasing power – with the European energy crisis as the icing on the cake. Most analysts now expect a marked slowdown in growth over the next few quarters; recession is the word of the day.

Another reason why stock markets bounced back in July is probably that investors are seeing signs that the situation may eventually improve. Inflation may soon peak, especially in the United States, and many people now expect that central banks, led by the US Federal Reserve, can start cutting key interest rates again in 2023.

Because of this year's overall stock market declines, valuations measured as price/earnings ratios have come down to more normal levels. However, they still have some way to go before reaching the lows seen during previous major slowdowns. Discounting an eventual turn for the better at this early stage consequently appears risky; disappointments during the autumn cannot be ruled out.

On the other hand, strong household and corporate balance sheets, easing global supply chains and cautious investor positioning suggest that we need not see the kind of downturns in growth and stock markets that followed the global financial crisis of 2008-2009.

Overall, we have a neutral view of risk-taking and recommend a “normal” asset class allocation. Given the prevailing major uncertainties, there is an obvious risk that we will be seeing dramatic shifts ahead, both within asset classes and between different types of equity investments. For this reason, diversification – risk spreading – appears to be a sound strategy.