The stock exchanges defied weaker macro figures

Globally, the long-term interest rates responded to weaker growth impulses and fell sharply in July. The stock markets, on the other hand, jumped up, quite clearly driven by interest-rate-sensitive growth shares.

For the month as a whole, the US S&P 500 Index rose by 9.2 per cent measured in USD, while the European Stoxx 600 Index increased by 7.8 per cent measured in EUR and the Nordic VINX Index climbed 7.3 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) rose by 7.1 per cent.

Technical recession

US GDP fell for the second quarter in a row and was down by 0.9 per cent in the second quarter of 2022. This is technically speaking a recession, but other indicators, such as the labour market, suggest that the economy is not that weak. The reduced momentum in the economy was mainly related to interest-rate-sensitive sectors such as housing and consumer durables. Europe is also showing signs of a weaker economy and this is reinforced by the energy crisis.  Nonetheless, the stock market responded positively to weaker macro data.  Especially growth-oriented sectors experienced a sharp upturn that coincided with a fall in long-term interest rates.

New interest-rate hikes

However, in July, the US central bank (FED) increased the interest rate by 75 basis points, in line with expectations. At the same time, the comments of central bank chair Jerome Powell were slightly more cautious than before, and he pointed out that the interest rates are almost neutral. The European Central Bank (ECB) also increased its base rate. This increase of 0.5 percentage points marked the first interest-rate hike in 11 years. In future, central banks must weigh the aim of reducing inflation against the effect of higher interest rates on a weaker economy.

Real-estate unrest in China

Zero tolerance for cases of COVID has led to several lockdowns in China and put a damper on the economy. In July, real-estate developer Shimao Group also went bankrupt, and this has led to renewed concern about China’s real-estate market. The problems really came into focus last autumn, when the country’s second-largest developer, Evergrande, started to have liquidity problems. The real-estate sector is an important driver in the Chinese economy and if the situation worsens it may affect other sectors. 

The road ahead …

Measured by the MSCI World Index, global shares rose by around 7 per cent measured in local currency in July. We have started to see reductions in the estimates of company earnings, but these have been moderate so far. Shares still appear to be an attractive asset class and can have inflation-protection properties. The prospects of a weaker economy may have a negative effect, but may also make central banks tighten monetary policy more slowly.