October has by no means been a dull month. The financial markets have been keeping a close eye on developments in both U.S. and European interest rates, while attention is now firmly focused on next week’s midterm elections. In this update, we take a closer look at three factors that are important for Norwegian investors right now: interest rates, the U.S. election, and the performance of the Norwegian krone.
Market update
Benedicte Johannessen
Head of Selection and Portfolio Manager of Kraft Strategisk
The Fed and Falling Government Bond Yields
There has been a great deal of attention surrounding the U.S. Federal Reserve’s interest rate meeting this week. As expected, the Fed chose to keep its benchmark interest rate unchanged. At the same time, the decision was not unanimous. Two of the twelve members voted for an interest rate hike, which illustrates that the central bank remains concerned about inflation.
The market is pricing in a high probability of an interest rate hike at the next monetary policy meeting in December.
Long-term interest rates have fallen
An interesting recent development is that U.S. Treasury yields have fallen relatively sharply since their peak in mid-October. This is happening despite the fact that this month’s inflation figures (CPI) came in slightly higher than expected. The decline is evident across all maturities, including the key U.S. 10-year yield. The reason appears to be a combination of communication from the Fed that reduced market expectations of an October rate hike, and selling pressure in tech stocks and turmoil in the credit market, which led investors to seek refuge in U.S. Treasury bonds. Increased demand is lifting bond prices and pushing yields lower.
In Europe, too, 10-year government bonds have fallen somewhat from their peak, although concerns remain, particularly regarding French government debt.
Midterm Elections Are Approaching
Next week’s midterm elections in the U.S. are being described by many as the most important political event of the year for the financial markets. Trump is not only facing challenges with his popularity outside the U.S., but he is also struggling with support at home.
House of Representatives
In the House of Representatives, all 435 seats are up for election, meaning the current mood among voters will have a major impact on the composition. Currently, the assembly consists of 218 Republicans and 214 Democrats. Polls suggest that the Democrats will take over the majority in the House of Representatives after the election.
However, the new composition will not take effect immediately. If the Republicans lose, a transitional period—often referred to as a “lame duck” session—will begin, lasting until the newly elected representatives take office in the new year.
The Senate
Republicans currently hold 53 seats, compared to the Democrats’ 47. Only one-third of the senators are up for election. These senators were elected six years ago, at the same time as President Biden, which was also a strong election for the Democrats. It may therefore be challenging for the Democrats to win the additional seats needed to secure a majority. Polls suggest that the race for the majority could be very close.
What Does the Election Mean for the Markets?
The stock market does not like negative surprises or uncertainty. Historically, the stock market has tended to weaken in the run-up to U.S. midterm elections and then rebound afterward. This is because the uncertainty is then out of the way, and investors know what to expect. This year, history has repeated itself with weaker stock markets leading up to the election, so we can certainly hope for some relief afterward.
A Democratic majority in Congress could make it difficult for Trump to push through major policy changes and reforms, which would provide stability—a factor that could also be positive for stocks.
At the same time, we must not forget that there are some clouds on the horizon that will not disappear with the election, such as inflation, unrest in the Middle East, fears about AI, and rising interest rates.
Currency
The krone continues to strengthen throughout the month
Several factors have contributed to the krone’s appreciation:
- Strong earnings mean that oil and energy companies (which have USD revenues) must buy more NOK to pay taxes.
- High oil prices make Norwegian energy stocks more attractive, and NOK is required to buy Norwegian stocks.
- Norwegian interest rates remain higher than in many other countries.
- Momentum investors have helped amplify this trend.
- Norges Bank has been a net buyer of NOK for much of the year
Although there is always a possibility that persistently high oil and gas prices could drive the krone even higher, several currency strategists point to the possibility that the NOK is “overbought” right now. Currency movements are difficult to predict, but one should not be surprised if the krone weakens slightly toward the end of the year.
We continue to monitor the markets closely and will provide another update in November.
