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Market Outlook: Greater risk appetite, in spite of headwinds

Most stock markets moved higher last week. Sweden’s All-Share Index (OMXSPI) gained 6.2% during March 11-18, as did America’s broad S&P 500 index. The Stoxx Europe 600 rose by 5.4%.

After Federal Reserve Chairman Jerome Powell’s statement on March 21 that the labour market is strong and inflation is too high in the United States, 10-year US Treasury yields continued to climb. They were at above 2.35% on March 22.

The world

Last week’s key interest rate hikes

Last week the most-watched macroeconomic news item was the US Federal Reserve’s monetary policy announcement. Just as expected, the Fed raised its key interest rate by 25 basis points to 0.25-0.50% and declared there would be further rate hikes during 2022. In separate remarks on March 21, Chairman Powell emphasised that the Fed will need to act more quickly to combat uncomfortably high inflation. US share prices dipped in response but regained ground and moved a bit higher on March 22.

The Bank of England also carried out a rate hike last week, bringing its key rate to 0.75%.

The Nordics

Key rate announcement from Norges Bank

On March 24 Norges Bank will publish its monetary policy announcement. The Norwegian central bank is expected to continue hiking its key interest rate.

Swedish home prices still climbing

Home prices rose by 1.6% month-on-month in February and 9.7% year-on-year, according to statistics from Valueguard, but looking ahead there are many indications that price increases will slow. The SEB Housing Price Indicator – the difference between the percentage of respondents who expect rising home prices and those who expect falling prices – plunged from 45 to 29, the lowest since the summer of 2020.


The Ukraine war – three scenarios

Extra Market Commentary, March 18, 2022

The tragic war in Ukraine is putting further upward pressure on energy prices and inflation, while pushing economic growth lower – especially in Europe. Stock markets began 2022 with a generally weak performance. It remains to be seen whether recent share price downturns are a reasonable adjustment to new conditions. Last week we presented three conceivable scenarios for economies and markets. Click on the arrow above to read our analysis.

Our market view

Updated market situation due to the Ukraine war

The terrible war in Ukraine continues. According to reports reaching us, there is a clear risk that it will go on for another while. In addition to human suffering, this will also have economic consequences, due to acts of war themselves and to the many sanctions that the war has triggered, but also due to the way consumers, businesses and investors react. The future impact on economies and markets will depend on what happens with all of the above, especially the war and the sanctions.

Developments in the energy market

The energy market in Europe has been stressed for some time, and recent developments will put it under further pressure. This is also one of the great economic risks of the Ukraine war. Europe's energy supply is largely dependent on deliveries from the affected region. If these deliveries are throttled by sanctions or damaged infrastructure, there is a great risk that energy prices will soar higher. This could have major consequences for economic growth in Europe, but in the long run also globally. Offsetting this is that both sides are dependent on a functioning energy supply system, but we will probably have to live with higher energy prices for a long period.

Inflation, purchasing power and key interest rates

Even before the war, we saw global inflation gradually rise to significantly higher levels than forecasters had predicted last autumn. What is happening now will add further upward inflation pressure, not only due to rising energy prices, but also because other product categories such as foods are being affected. Higher inflation is worrisome from two perspectives. It erodes consumer purchasing power, which risks hurting demand in the economy. It also puts pressure on central banks to raise key rates faster than they had previously communicated, which in turn may inhibit growth.

Developments ahead

This situation is undeniably worrisome, and the risks have increased. But there are counterforces. Before the Ukraine war broke out, most observers − including us − expected relatively healthy economic growth this year. Forecasts were well above the historical average, so even if these forecasts must now be greatly lowered, growth may still be relatively good, since there is a "buffer" to draw from. Other positive factors are that both households and businesses have maintained relatively high savings ratios and thus have strong balance sheets. The effects of the war are also likely to be offset by various types of fiscal stimulus, for example subsidies or tax cuts to soften the impact of price upturns. We are also likely to see increasing capital spending, especially aimed at accelerating the transition to more renewable energy sources.

But overall, most indications are that the inflation forecasts that were made before the outbreak of the Ukraine war must be raised, while growth forecasts will need to be lowered. The difficult question is how large these revisions will have to be.

In addition to the usual economic risks, the situation has been complicated by the tragic war and its effects. As usual, the financial markets have reacted quickly to the new conditions. The recent stock market decline shows that investors are already expecting more headwinds from inflation and growth. This is also evident in the form of outflows from risk assets such as equities and corporate loans. Investors have thus discounted worse conditions, at least in part. It is too early to say whether this is enough, too much or too little. This will depend on events related to the war, sanctions, commodity prices and more. Near-term developments are uncertain and risky, yet we still believe that over time, risky assets such as equities have the potential to generate good returns.