DNB| Luxemburg, 15.10.2015.
Expect the unexpected October 2015. The third quarter of 2015 was marked by increasing volatility in the markets worldwide. Several factors played a decisive role. These include the development in China and the emerging markets in general, the decisions by several central banks and the price of oil. As one should anticipate, all factors intertwine.
China and the Fed: Most analysts agree that the growth of China’s gross domestic product will be lower in the future than in the past. With this development, which had to be expected in the medium term, the growth rates have to reduce after years of above-average growth. While this development is normal market participants are surprised.
Not normal in this context, however, is that the Fed has not carried out an expected raise of interest rates. The reasoning was simple but entirely unexpected: the Fed is worried about the Chinese economy. Fed chief Janet Yellen looks with great concern to Asia: “Much of our attention was on risks around China and the emerging economies,” she told the press.
Now one may wonder why the Fed cares about the Chinese economy and is acting totally unexpected? One argument is certainly the strengthening of USD while raising the interest rates. A further strengthening of the USD against the currencies of emerging countries would reinforce the existing problems there and favors a flight of capital back into the USD. A strong USD correlates with weaker prices of commodities, especially oil prices. What is really good for the budget of consumers is a drama for many resource companies. The market anticipates falling profits and higher failure rates in the oil sector. At this point we do not light up the oil market, but want to pay attention to a further central bank decision.
Norway
Unexpected and not in line with consensus expectations was the reduction of interest rates by 25 bps by the Norwegian Central Bank. The market anticipated this step in December 2015 and accordingly was the reaction on the Norwegian stock market, particularly financial stocks lost sharply in value. The Norwegian central bank is worried about the economic situation in Norway, as in particular the declining oil price has a massive impact on Norway. According to Bloomberg, about a quarter of Norway’s GDP is generated in the oil sector, one out of nine employees works in the oil industry. The devaluation of the Norwegian krone came in line with declining prices in the oil price. However, a weakening currency has not only negative consequences for a small and open economy like Norway, exporting companies get a competitive advantage and may be able to gain market share. The Norwegian krone compared to the Swedish krone weakened more against the euro in the meantime, which is a new situation for many market participants.
Also new are very strong movements due to low liquiditynin the Norwegain currency, which led some analyst to give critical and cautious comments. However, this environment is challenging not only for FX-traders, in particular the cost-intensive and cost-sensitive oil industry is struggling with these new challenges. In the upcoming last quarter in 2015 market participants and companies are faced mainly with uncertainties. Investors should be prepared for increased volatility and declining liquidity, the next interest rate decisions by the central banks are thrilling! Investors should expect the unexpected!
Hagen-Holger Apel, Economist DNB Asset Management
Hagen-Holger Apel is Senior Portfolio Manager at DNB Asset Management S.A. since July 2015. Mr. Apel is an economics graduate (LMU Munich) and Certified International Investment Analyst (DVFA Frankfurt). He has close to 10 years
experience from working in the Luxembourg financial centre. He speaks German, English and Swedish.
