Strong summer sprint

Following weak developments in May, the stock markets experienced a strong end to the first half-year in June. Yet again, it was smoke signals from the central banks that contributed to the change in mood.

For the month as a whole, the American S&P 500 Index rose by 6.9 per cent measured in USD, while the European Stoxx 600 Index increased by 4.3 per cent measured in EUR and the Nordic VINX Index ended the month up 4.6 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange (OSEBX) climbed 1.5 per cent.

About-turn by the Fed

A few quarters ago, many central banks had started to normalise monetary policy by introducing higher interest rates and reducing their balance sheets. The US central bank (Fed) led the way, with an interest-rate hike as recently as in December. Growth was good and unemployment was record-low. Since then, however, the Fed's message has changed dramatically. Firstly, the Fed stopped reducing its balance sheet (QT) and then, at the latest interest-rate meeting in June, it indicated there would be an interest-rate cut in the autumn. The interest-rate market is now pricing in all of four interest-rate cuts over the next 12 months, largely based on expectations of lower growth linked to the trade war. This about-turn can also be viewed as Trump's victory over the central bank.

The ECB is following suit

The European Central Bank (ECB) quickly jumped on the bandwagon, and Draghi clearly indicated that the ECB will also react by introducing stimulus measures if necessary. In light of the worsening growth prospects in the eurozone for well over a year, chiefly linked to Germany as the main engine, this appears to be more rational. Nonetheless, the total growth is not at crisis level and unemployment is still falling. In addition, the interest rate is already at minus 0.4 per cent, and the quantitative easing (QE) measures were recently stopped.

Back to the negotiating table

The trade war has attracted a lot of attention since Trump chose to escalate it in May. There was therefore a lot of tension linked to the G20 summit in Japan, which ended with another truce and new rounds of negotiations. It remains to be seen whether the negotiations will succeed. Trump may at any time send a tweet that escalates the conflict once more. However, the financial markets appear to be confident that a solution will be achieved.

The road ahead …

The road from normalisation of the monetary policy to the opposite is obviously short. The faith in increased stimulus measures by the central banks, combined with continued growth in the companies' earnings, is positive for shares as we enter the second half-year.

"The job of the Central Bank is to worry"
Alice Rivlin