Market Outlook

iNvESTMENT STrATEGy

September 11, 2012

New stimulus from major central banks

The first financial market week of September was coloured by central bank signals and announcements from the United States and the euro zone. Although there were few surprises at the US Federal Reserve (Fed) symposium in Jackson Hole, Wyoming the previous Friday, markets were pleased last week about Fed Chairman Ben Bernankes hints that a third round of quantitative easing (Q3) in the US is not out of the question. The European Central Bank (ECB) left its key interest rate unchanged at 0.75%, but this was offset by ECB President Mario Draghis presentation of the banks new Outright Monetary Transactions (OMT) programme for buying sovereign bonds from problem-plagued euro zone countries. Under OMT, the bank will buy bonds only in the secondary market and will not enjoy priority over other creditors. Before the ECB begins such purchases, a country must apply for aid from the European Unions EFSF/ESM emergency rescue funds and accept the conditions required in their agreement with these funds. Americas ISM purchasing managers index for manufacturing came in lower than anticipated, despite preliminary data from Markit indicating a slight upturn. The week ended with a report on unexpectedly slow US job growth. Swedens Riksbank lowered its repo rate by 25 basis points to 1.25% and unveiled a new rate path forecast indicating that this was its last rate cut, but SEB predicts a further 25 point cut in December.

September 7 local currencies

MSCI AC World NR S&P 500 (US) OMXS 30 (Sweden) High yield index, US*

Change for the week

2.1% 2.3% 2.6% 0.7%

Change so far in 2012

9.9% 16.1% 12.8% 11.3%

September 7
10y euro zone bond yield 10y Swedish bond yield EUR/SEK exchange rate USD/SEK exchange rate EUR/USD exchange rate Oil, USD/barrel, Brent VIX volatility index

Level
1.52% 1.46% 8.45 6.59 1.28 114.2 14.4

Level 1/1 2012

1.88% 1.83% 1.62% 8.91 6.89 1.29 109.2 23.4

10y US Treasury note yield 1.67%

*Merrill Lynch High Yield Master Index

An action-packed week has begun for policy makers

This week will see some very important economic policy announcements that will impact the market climate in the near future. On Tuesday, more details about the planned EU/euro zone banking union will be unveiled. On Wednesday, Germanys Constitutional Court will announce its ruling on whether the European Stability Mechanism (ESM) rescue fund is compatible with the countrys constitution. The Dutch election takes place the same day. On Thursday the Fed will announce whether it will launch any QE3 stimulus measures, and the Group of 20 (G20) meeting will begin in Mexico City. On Friday and Saturday, EU finance ministers will meet.
27.5 27.5

25.0

25.0

22.5
Percent

22.5

The calm before the storm?

Last week the VIX volatility index fell sharply. The VIX is once again approaching historically low levels. Economic policy announcements in the near future may well result in higher volatility and a rising VIX index.

20.0

20.0

17.5

17.5

15.0

15.0

12.5 Dec Jan 2011

Feb

Mar

Apr

Maj 2012

Jun

Jul

Aug

12.5

Source: Reuters EcoWin

Market Outlook
iNvESTMENT STrATEGy

Central banks determine the mood

The ECBs decision to launch its Outright Monetary Transactions programme boosted market confidence in the central banks attempts to ease the financial pressures on problem-plagued countries and reduce the risks of financial and economic contagion in the euro zone. ECB bond purchases will not, however, solve the common currency areas fundamental problems, and various factors still risk prolonging the process. Crisis-hit euro zone countries, mainly Spain and Italy, must first apply for help, and the German Constitutional Court may vote no to the ESM on September 12. The markets high expectations before the coming economic policy announcements carry a risk of disappointments. Further quantitative easing will gradually push investors further out on the risk scale. There is a lack of consensus about QE3, but last weeks economic disappointments in the US have bolstered arguments in favour of such monetary loosening.

Exposure
Given a growth scenario, greater potential upside for cyclical shares than for defensive ones -valuations are probably attractive, but the uncertainty is far from over, and there is a risk of a continued weak economic trend in the wake of gloomy macroeconomic data Continued positive view of high yield -bonds where the yield gaps against sovereign bonds remain attractive Exposure to sovereign bonds in emerging markets -attractive expected returns and good portfolio diversification through exposure to EM sovereign bonds

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