Why are equity markets falling?
The recent market downturn is due to a combination of factors, primarily the perception that the Federal Reserve made a policy error by not cutting interest rates at its last meeting, compounded by bleak macroeconomic numbers from the US and an unexpected interest rate hike by the Bank of Japan last week.
How worried should we be about the US economy?
The US economy shows troubling signs, including last week’s poor job numbers and rising unemployment. The latter is partly due to more people entering the labour force rather than many people becoming unemployed. While some indicators are flashing warnings, it is unclear if a full recession is imminent. Our base case is that we can avoid a recession and that this is a growth pause.
How should we think about the situation in Japan?
The Bank of Japan’s interest rate hike has caused significant market reactions due to the country’s high debt levels and long history of zero interest rates. This has added to market uncertainty and volatility. The country has been used to paying almost nothing for its debt for decades. From an international perspective, borrowing in the Japanese yen is used to fund leveraged investments in other parts of the world, which adds to the risk-off move.
Will central banks now cut rates faster?
The market anticipates aggressive rate cuts from the Federal Reserve, with expectations for 50 basis point cuts in September and November. This expectation shift reflects concerns about the Fed’s recent decisions and the broader economic outlook. There is even a chance the Fed will cut before its next meeting.
Markets are now pricing in a 50 basis point cut from the ECB as well. This is a significant shift from their previous meetings when such cuts were not anticipated. Other central banks, including the Swedish Riksbank, are also expected to cut rates.
The rapid decline in bond yields may help avoid a hard landing, but caution is advised until more evidence is available.
Is there anything in Nordic specific to the Nordic region?
Particularly Sweden is experiencing currency devaluation, which helps protect industries but makes foreign travel expensive for citizens. If the global economy avoids a hard landing, there is potential for recovery.
What strategies should investors take?
Strategic investors with a long-term perspective should be cautious but never underweight equities unless a recession is the base case. Tactical traders with a shorter-term perspective, however, should be prepared for further market declines of 5-10 per cent before potential recovery.