Increased volatility

February started with a stock-exchange fall triggered by the fear of inflation and interest rate hikes. The markets gradually calmed down without completely shaking off their fears.

During the month as a whole, the US S&P 500 Index fell by 3.7 per cent measured in USD while the European Stoxx 600 Index declined by 3.8 per cent measured in EUR and the Nordic VINX Index dropped by 0.5 per cent measured in NOK.

Inflation and customs tariffs

After several years of moderate inflationary pressure, inflation is expected to rise in many places. This is linked to good, synchronised global growth and to the fact that the USA is increasing its fiscal policy stimuli in a mature phase of the economic cycle. The budget deficit is now expected to increase to 5-6 per cent of GDP in the years to come. This is more than previously estimated and thus increases the concerns about overheating, wage growth, inflation and higher interest rates.

Several inflation and wage-growth figures that were a positive surprise in January, along with revised figures in the labour market report showing a clear upward trend, contributed to the correction at the beginning of February. Trump's protectionist measures and statements at the beginning of March, especially regarding new high customs tariffs on steel and aluminium imports, were also not suitable for calming investors.

Twin deficits and a weaker dollar

Due to the large deficits in the public-sector balance sheet indicated by the budget deficits, several parties now expect the deficit in the USA's current balance to increase in future. In theory, the currencies of countries with a negative current balance will be weakened, and vice versa, so some people both explain and expect a weakening of the dollar as a result of this.

A third consequence of a larger budget deficit is that the increased national debt must be financed by more government bonds being issued. For this reason, the USA is expected to make more government bonds available to buy in future, while the central bank (Fed) at the same time reduces its supportive bond purchases. This will alter the balance between supply and demand and thus also the price.

The road ahead ...

After 14 consecutive months of an upturn in global shares at the beginning of 2018, a correction was in the air. The fact that stock exchanges experience a correction at irregular intervals is completely normal. Rising stock exchanges for 14 months in a row is abnormal. Here at Delphi Funds, we have tightened our safety belts but still believe that 2018 will be summed up as a positive stock-exchange year.

"Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs"
Alan Greenspan