A tug-of-war is ongoing

August was a turbulent month in the stock markets. Trump's escalation of the trade war with China and, not least, tug-of-war with his own central bank helped to maintain the excitement.

For the month as a whole, the American S&P 500 Index fell by 1.6 per cent measured in USD, while the European Stoxx 600 Index dropped by 1.3 per cent measured in EUR and the Nordic VINX Index climbed 1.7 per cent measured in NOK. In Norway, the Oslo Stock Exchange (OSEBX) rose by 0.25 per cent.

Macro figures and interest rates

During the summer, we saw a weakening in global macro figures. The rate of decline has now slowed and the downturn is also no more than expected. Globally, it is becoming increasingly clear that the manufacturing sector is struggling while the service sector is doing better. Low levels of unemployment are maintaining the growth in private consumption and consumer confidence. At the same time, we are in a phase where the long-term interest rates in the USA are lower than the short-term interest rates. An inverted interest-rate curve has historically been a good indicator of a recession. However, unlike before, the central banks are currently willing to start printing money and cut interest rates. In that way, they can keep a recession at a distance.

Trump vs. Powell

At the beginning of August, the US central bank (Fed) cut the interest rate for the first time in a decade. However, Trump was far from pleased with the central bank's rhetoric and forward guidance. He responded by increasing the tariffs on goods imported from China, and thus put additional interest-rate pressure on central bank head Jerome Powell. Mr Powell countered by saying there were no immediate plans to make further cuts, thus disappointing the stock markets. Many people expect the tug-of-war to continue until next year's election, and that Trump will force through several interest-rate cuts before he terminates the trade war in a way that is positive for the market.

The ECB is following suit

When the Fed does a complete about-turn, other central banks usually follow. In August, the European Central Bank (ECB) also announced an interest-rate cut and that it would start printing money again. This helped to strengthen the global fall in interest rates. At the same time, the weak German economy is expected to get a longed-for lift. In the UK, there seems to be complete Brexit chaos, and Boris Johnson has already suffered his first humiliating defeat. His time as prime minister may be short.

The road ahead ...

There is currently a tug-of-war between the US central bank and Trump, and this is unlikely to be finished before the election in 2020. If Trump wins, the result may be strong growth and rising stock markets. At the same time, falling interest rates in themselves make shares more attractive.

"I've always won, and I'm going to continue to win. And that's the way it is"
Donald Trump