The Swedish rate experiment; miners are not buying the “rebound” trade
Head of Equity Strategy
Summary: In today's equity update we take a look at the Riksbank and it likely move to zero on rates and what the implications are for Swedish equities. In addition we take a look at emerging market equities which are currently outperforming. We are also highlighting that global mining companies are not rallying to the degree we would expect in an economic "rebound" trade.
On Thursday the Riksbank likely ends its negative rates experiment that started in 2015. The move is controversial as the Swedish economy is struggling, but a clear sign that the Riksbank is judging that negative rates on the margin is more harmful than beneficial to the economy and society. If the move to zero goes well it could lead the way for the ECB to change its policy mix as the ECB president Lagarde has indicated she would like to see. For now, Swedish equities have not lost out to European equities as the policy rate differential has widened over the past year. On the economy, it’s too early to conclude anything other than the Swedish services PMI figures plummeted to 47.9 in November the lowest reading since the euro crisis. With a positive 0.5% fiscal budget to GDP the Swedish government has a massive room for expanding the fiscal spending and offset any external or rate driven weakness. With Sverigedemokraterna gaining in the polls we believe the government will be forced to do massive fiscal spending.
As we wrote about last week the OECD’s leading indicators suggest that the global economy swung into the recovery phase in October and historically this has been good for emerging market equities. So far, we are observing this in markets with a 2%-points gain against developed market equities since last week. Weaker USD through the Fed’s liquidity operations and improving economic conditions should support that trend going into 2020.
While a potential melt-up scenario in equities is gaining momentum there’s one segment of the equity market that’s not buying into the “rebound” trade and that’s global mining companies. Typically we observe a strong outperformance when confidence in an economic rebound rises but so far mining companies are not outperforming the general equity market. This is not a healthy sign for the current equity rally so one has to be moderately cautious on the current equity momentum.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.