Test 115 EN

Throughout the last six months, I have argued that the financial markets are experiencing a huge correction. The correction comes after a decade of exceptionally low interest rates, and partly very low energy prices in Europe. Since spring, we calculated how deep the correction could be, which continues to remain as “just” a correction; and that is where the rates and the financial markets are right now. An example is illustrated by graph one, which shows the Wilshire 5000, an index including the overall US stock market.

The current important factors in the financial markets will hardly surprise anyone, but the key is to which extent the factors already are priced in the markets.

Inflation continues

It is correct that there is a recession-like development on the way in Europe and the USA, though I argue that the stock markets have reacted negatively to this outlook several times. I even deem it possible that the US gets to avoid the worst crisis, which should have a positive effect on Wall Street.

In the US, the decline in growth will be partially forced through by the Fed’s interest rate increases. The next jump in interest rates of 0.75 percentage points will not be a surprise to anyone at all, and another interest rate increase of the same size is also on the cards.

In Europe, the European Central Bank (ECB) is also heading towards more rate hikes. It is not the economic growth that must be slowed down, though the interest rate must rise to a minimum level for natural reasons, and to partially match the inflation level. The German bond market priced in an ECB rate of 3 pct. a few weeks ago, and I do not expect it to go higher in this round. Here, I also expect that investors are already prepared for that development.