American employment figures
After American employment figures for April were published late last week, stock markets surged higher – even though the jobs report actually showed unexpectedly weak employment growth. Ten-year US Treasury yields initially fell by some 10 basis points to around 1.50%, while the US dollar lost ground against the euro. The downturn for long yields has since reversed, however, and 10-year Treasuries are now back at above 1.6%.
Cyberattack knocks out major fossil fuel pipeline to US East Coast
A pipeline carrying transport fuels from the US Gulf Coast to urban areas along much of the East Coast shut down last Friday, May 7, after the company that operates it became the victim of an international cyberattack. The pipeline is the largest in the country and carries an estimated 45% of all petrol, diesel and jet fuel consumed on the East Coast. The operator, Colonial Pipeline, closed portions of its operations including the main pipeline as a security precaution when it discovered the ransomware attack. The situation has not yet been resolved, which may lead to higher US petrol prices in the near term.
Swedish home prices are expected to keep climbing
On May 10 SEB published its Housing Price Indicator, which continued upward by three percentage points to 66 (all respondents expecting higher home prices minus those expecting lower prices). This is still a bit short of the all-time high, 72 (2015), but the percentage of responding households that foresee a drop in prices during the coming 12 months has never been lower than in May (4%). At the end of August, Swedish authorities will reinstate the mortgage principal payment requirement. This may possibly dampen the price upturn somewhat, although it is hard to believe that the temporary suspension of the requirement during the COVID-19 pandemic has materially affected the housing price rally.
Finally we would like to remind our readers about the 60-page quarterly Nordic Outlook research report that SEB published last week. You will find it by clicking on the link below. As if this were not enough, the Investment Outlook report, which we will release next week, will present our own current view of economic and financial market developments. Keep an eye out!
Our market view
Recovery will support stock markets
Corporate earnings reports for the first quarter of 2021 are now pouring in. So far the trend of the past few quarters is continuing, with upside surprises predominating in the reports. The rather lukewarm market reaction probably reflects sizeable increases in share prices ahead of the reports. We remain relatively upbeat about stock markets, as explained below.
Strong investor faith in a coming economic recovery is providing continued support to stock markets. Another contributing factor is that the upturn in US Treasury yields has levelled off somewhat in recent weeks. Most observers, including us, expect further small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices.
Excessively rapid and/or large yield increases may of course disturb this scenario. Likewise if production disruptions − such as the semiconductor and other component shortages reported by many companies − have an impact on corporate earnings. The quarterly report season that is now under way will be important to future share prices. Despite these risks and recent price upturns, we are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective, but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, causing downward adjustments in companies' earnings forecasts, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. Recent market upturns naturally increase the risk of profit-taking, with downturns of 10% or perhaps 15%, yet we expect stock market indices to be a little higher this coming autumn than today.