Markets Wrap (1H September)

This year ECB warmed up, next year await the real cuts
ECB meeting last week marked the second 25 basis point rate cut this year. ECB situation is an interesting one: bank's officials are tight lipped on any upcoming rate cuts, but both cuts this year have been predicted without a shadow of a doubt by both markets and economists. While June's cut was preluded by excessive comments from ECB officials, this time there was a little bit less chatter. Now October will be an actual test, as there is no consensus for the meeting. Most research houses (SEB included) are predicting a pause next month, but the market is still having some hope (~30% chance) of a 25 basis point cut. At least for now, next year the market is eying almost 1,25%p point reduction in the first half of the year. Economists and some ECB officials (from recent comments) are a bit more conservative, looking at 0,75%p cuts during the same period. What can be certain, is that the vague ECB rhetoric will continue for the time to come.

FED's rate cuts will be the real test
Ever since November, the main thing markets have been focused on were FED rate cuts. Bonds, equities, commodities and many other foreign currencies have fluctuated with market outlook for lower FED rates. After a long time, the time to cut is now. Out of the main developed economies, the US with 5,25-5,5% interest rates has the highest borrowing costs. For this year the market and most economists are looking at 1%p lower rates. September's FED meeting might be outlook confirming or refining meeting, depending on the size of the cut and J. Powell supplementary commentary.

Oil prices at pre-pandemic levels
OPEC+ for the past few years have curtailed its oil production to maintain oil prices at sufficiently high levels (80-90 USD/bl). Furthermore, the cartel has managed to keep oil prices in a small range with very subdued volatility ever since end 2022. However, oil production has still increased, and the US in particular managed to increase production significantly. Now OPEC+ wants to increase production again, but the market is fearing a glut. China, the world's largest oil importer, is slowing down and is signaling weaker oil demand. In combination, this lowered oil prices to 2021 levels. However, low oil prices are the medicine for weak demand. China itself is showing indications of increasing oil and product purchases at current prices. The US also could increase its strategic reserves which it had depleted in the height of the energy. SEB group has recently lowered its Brent oil price forecast in 2025 to 75 USD/bl.

Natural gas prices in Europe continue to stay high
While oil prices receded, gas prices in Europe stayed high despite high storage levels. Global LNG markets are tight and Europe is competing for imports with Asia (largest LNG importers). Europe is still dependent on a few big players for its gas needs, mainly Norway, US and Russia. A possible cold winter, uncertain russian gas supply in 2025 and the variability of LNG markets is keeping traders on high alert. While prices at around 35 EUR/MWh are down several times below 2022 levels, our energy costs are far higher than that of the US. SEB group has increased 2024 gas price forecast to 38 EUR/MWh.

The information provided should not be interpreted as a personal recommendation, instruction or suggestion to buy or sell financial instruments and cannot be the basis or part of any subsequent transaction. AB SEB bankas has prepared this document based on information received from, in the bank's opinion, reliable sources, but not verified by itself. AB SEB bankas is not responsible for the accuracy or completeness of this information. The document may not be copied, reproduced, reprinted or otherwise reproduced without the consent of SEB bank. The publication was prepared according to Bloomberg, SEB information.