Paul Harper believes that the current situation is reminiscent of the fourth quarter of 2018 – when the Oslo Stock Exchange fell by 17 percent

Paul Harper believes that the current situation is reminiscent of the fourth quarter of 2018 - when the Oslo Stock Exchange fell by 17 percent

The main index rose in the Oslo Stock Exchange Friday’s New Top ListIt is, therefore, up 6.3 per cent so far this year – despite rising interest rates, inflation fears and the war in Ukraine.

This is largely due to higher energy prices, and significant that the stock exchange’s locomotive Equinor has also reached an “all-time high”.

Oil prices have fallen slightly, but are still just over $100 a barrel.

Next week, inflation figures for a number of countries will be presented, but for stock markets, only US numbers will be able to make a real impact, according to stock strategist Paul Harper at DNB Markets.

He thinks the most exciting thing is how quickly US inflation numbers may begin to fall again over the summer, after what will likely be a 40-year high for numbers coming this week.

Inflation numbers may influence the upcoming Federal Reserve interest rate meeting in May. Harper believes the signals from Fed members have been so clear that the market is now pricing in an 85 percent probability of 0.5 percentage point increase instead of 0.25.

The market’s assessment of this possibility may rise slightly towards the meeting. For the Fed, a rate hike like this costs little when the market expects it. It makes sense on their part, Harper says, when they realize they’re a little late.

Reminds us of fall 2018

In recent weeks, there has been much talk about the yield curve, after the US government’s two-year interest rate exceeded the ten-year interest rate. This is called an inversion, and has historically been a warning that a recession is imminent. A recession means a severe economic contraction, and is defined by the economy contracting for at least two consecutive quarters.

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Harper believes that every time the yield curve inverts, there is a reason why it doesn’t fit this time around.

Historically, there has been a high degree of accuracy regarding economic recession in the United States over the next 18 to 24 months. A possible counterargument I can see now is that quantitative easing has pushed the 10-year-old down, which might give the wrong signal. But on the contrary, one can say that if the Fed raised interest rates earlier as it should, the two-year-old would have been higher, and then the person might have received an investment anyway.

According to Harper, there are clear indications of a tough approach to both rate hikes and quantitative easing, a combination that could have a severe impact on stock markets.

The last time this happened was in the fall of 2018, when the main index on the Oslo Stock Exchange fell 17 percent during the fourth quarter.

The stock strategist thinks Norway is unlikely to escape this time around.

– There is a tendency for the development to spread relatively quickly from the USA to Norway, especially in the stock market. The possible exception is if you’re still a solid commodity market, which has led to a rally in the Oslo Stock Exchange so far this year.

Investors are becoming more defensive

The Oslo Stock Exchange opens halfway on Wednesday, then closes for Easter until Tuesday, April 19. In the meantime, a lot can happen, given the high degree of uncertainty that characterizes the markets at the moment, and therefore there will be higher risks than those usually associated with investing in the market.

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However, Harper doesn’t think the pros will make major changes to the portfolios.

You are not likely to increase exposure to situations that you are not comfortable with, but there will likely be more small adjustments than big ones. Besides, April has generally proven to be a good month in the stock market, although it often includes Easter.

Is energy still the winning sector on its way forward?

– It’s hard to say. The price of oil found some support at around $100. It’s a little lower than the top, but I don’t see it set back much. The energy still looks exciting going forward.

But other than that, he’s seeing signs of more defensive centralization in the market, as strong stocks that had a tough time earlier this year are starting to move in. It highlights Orkla, Telenor and the northern health sector, which rose 3.7, 2.2 and 5.3 percent respectively last week – while the main index rose 0.5 percent in the same period.

– They’re classic defensive options, and I don’t think they’re particularly expensive. If the market is nearing the end of the cycle, there will naturally be a rotation towards more defensive sectors. It fits into the narrative where one fears a recession, he says.

More numbers

Formue’s chief strategist Christian Lee also points to inflation numbers and interest rate meetings as important next week. Additionally, highlights Thursday’s numbers for US retail. The chief strategist thinks it will be interesting in light of the US consumer confidence update coming the same day.

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Formue's chief strategist, Christian Lee, believes Tuesday's inflation numbers from the US will be significant.

Formue’s chief strategist, Christian Lee, believes Tuesday’s inflation numbers from the US will be significant. (Photo: Dedrick Lenrod)

– What makes the inflation numbers more important than they have been for a long time is that inflation has surprised to the upside for a long time now. The impact of the war on commodity prices has helped postpone the normalization of inflation that would have occurred if there had been no war. This creates very significant challenges for central banks and the global economy, Lee says.

He adds:

For central banks, this will be a delicate balancing measure, especially for the European Central Bank, which may have to normalize monetary policy in a situation where economic growth is declining and uncertainty is increasing.

Many followers now

Lee thinks the recession in the US is particularly sensitive to stock markets.

– Then there is a high probability of global consequences. This is why so many are now following the US Federal Reserve.

And in the stock markets, too, Lee believes in the act of balancing. He believes that the balance between risk appetite and risk aversion is delicate at the moment, also because financial markets seem to expect that looming monetary policy tightening will occur without a high risk of recession.

On the one hand, you have an uncertain world view. Analysts are expected to continue lowering their growth estimates. It could also eventually lead to analysts becoming somewhat less sanguine about earnings estimates, which could prove difficult if it happens at the same time as market interest rates are rising, Lee says.

It also suggests that investors’ willingness to take risks can be challenged.

If you see that the Fed starts quantitative easing and at the same time raises the key rate sharply, then increased uncertainty about the overall picture and earnings prospects will get more attention from investors, which in turn may challenge the appetite for risk.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.

Dalila Awolowo

Dalila Awolowo

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