Weekly comment from Swedbank Investment Center: Market climate makes for uncertainty in stockmarkets

23-04-2013 14:34

Last week was an off-week for stockmarkets. First quarter macro figures came in weaker than market expectations, which resulted in risky assets being sold and profits taken. Most stockmarkets did well in the first three months so there was quite a bit of profit to take. Slower economic growth statistics from China and recurring concerns about growth in Europe also contributed to market uncertainty.

"The current market climate means that stockmarkets are particularly vulnerable to bad news. In the media, the risks related to the Cyprus solution as well as the Italian elections and the situation in Spain have been cited as major risk factors. In our scenario we do not believe that Europe will grow until possibly in the second half of the year and then it will be weak growth. But some players had expected to see growth earlier than that. Nothing in the underlying scenario has changed and we must not forget that we have a positive underlying trend for the global economy,” says Sara Arfwidsson, market strategist at Swedbank Investment Center.

Gold prices have plummeted, partly because Cyprus had to sell some of its gold reserves to finance part of the deal that was made with the Troika. Cyprus accounts for a very small part of the gold reserves, but the fear that more would follow in their footsteps made hedge funds start selling gold and a large part of the price slump is linked to speculative money.

Forecasts adjusted downwards in Sweden
Last Monday, the Swedish government presented its spring budget at the same time as it adjusted down its expectations for Swedish growth. The forecast is now lower than both Swedbank’s and the market’s, unlike previously when the government's growth and unemployment forecasts greatly surpassed those of the market.

"They will probably have to adjust their forecasts upwards. The new forecast could be tactical prior to the elections since it’s good to be able to surpass the forecast in the autumn budget and show greater scope for reforms. The spring budget did not include more measures to bring down unemployment, one of the main concerns in the Swedish economy right now, but we expect the government to allocate resources for this in the autumn budget,” Sara Arfwidsson went on to say.

As expected, the Riksbank decided to leave the repo rate unchanged at 1 per cent. The school books would say that interest rates should have been cut long ago since Sweden has very low inflation today, however, rising property prices and household debt are seen as a threat to financial stability and therefore this has not been done. Economic recovery in the first quarter was slower than what the Riksbank had expected and therefore the interest rate trend was lowered, which means that interest rates are likely to remain at current low levels for another year.

The US Beige Book, an indicator that collects financial data from each Federal Reserve bank in its district, confirms the country’s economic recovery, even if it is slow. Most districts report an increase, especially in manufacturing. Construction-related businesses in particular are doing better and house prices have risen in many districts. However, private consumption has not really taken off yet, largely due to higher taxes as a result of the fiscal cliff settlement.

Sara Arfwidsson, Market Strategist at Swedbank Investment Center