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Monday, June 24, 2024

Markets flew after interest rate cut

Oil prices rose, the Oslo Stock Exchange (OSE) rebounded and all of its most-active shares were showing strong gains after Norway’s central bank slashed interest rates Friday morning. There was no lack of drama, though, after an unusual halt in trading and a delayed open for hard-hit Norwegian Air.

The sun was shining on the Oslo Stock Exchange on Friday, and share prices rebounded after the central bank slashed interest rates. PHOTO: Møst

It was another breathless day for business owners and investors after the OSE’s main index jumped around 5 percent. Trading of shares in Norwegian Air Shuttle was quickly halted, though, because of huge differences in price expectations following news Thursday night of proposed state aid for the deeply troubled airline that’s currently mostly grounded. Newspaper Dagens Næringsliv (DN) reported how sellers’ prices were double those offered by buyers.

OSE ultimately decided to dump all orders for Norwegian shares (ticker NAS) that already were in their system, and start fresh when it allowed trading to resume. Then prices took off, up more than 20 percent over Thursday’s close at one point, then falling back to 14 percent and swinging widely at midday. By early afternoon, they were down again, with the wild fluctuations linked to varying interpretations of the effect of the government’s offer of NOK 3 billion worth of state loan guarantees for Norwegian (and another NOK 3 billion for other airlines with operating licenses in Norway).

While Norwegian executives expressed gratitude for the offer they were mum about strict conditions attached to it. They later reported that they’d hired in lawyers and financial advisers to help them with yet another financial restructing process at a time when the airline’s liquidity is under severe pressure.

The state’s loan guarantee conditions effectively mean the airline will have to come up with more capital on its own and win more concessions from already weary lenders. Some analysts don’t think the airline will be able to meet the conditions, concerns that in turn led to new reports that bankruptcy remained a threat.

Many shares recovering
Meanwhile, other leading issues on the OSE were all recovering mightily, with state oil company Equinor up around 5 percent at noontime and well over the NOK 100-per-share mark that it had dramatically fallen under earlier in the week. Norway’s biggest bank, DNB, was up more than 2 percent, also well over NOK 100 per share, and fertilizer firm Yara International was up 3.5 percent to NOK 316.

Other oil- and oil service companies that have been clobbered during the recent market turbulence tied to Corona virus containment measures were also showing strong gains, with Aker up more than 5 percent, Aker BP up 12 percent, Borr Drilling up a stunning 32 percent (it had been among the heaviest losers over the past two weeks), Odfjell Drilling up 10 percent and Subsea 7 up 12.4 percent. Even hydrogen firm NEL, which also has been battered and among the most-actively traded, was up 7.36 percent.

Central bank slashed its key policy rate
Most of the gains were tied to the central bank’s decision to cut interest rates for the second time since just last week, and relatively substantially at that. The board of Norges Bank has generally opted to only “adjust” already historically low rates by a quarter-point but at another extraordinary meeting on Thursday, its Monetary Policy and Financial Stability Committee tripled the effect by cutting Norway’s key policy rate by three-quarters of a point, from 1 percent to just 0.25 percent. Last week it had doubled its thrust when the committee cut the policy rate by half-a point, from what had been 1.5 percent.

The Norwegian krone quickly strengthened once again on Friday and so did the market, since the rate-cut announcement came just before trading on the OSE opened. It means interest rates haven’t been this low in the central bank’s more than 200-year history. It’s as if the central bank made three separate cuts all in one go, getting the reaction desired but also reducing latitude for further market stimulus.

Banks urged to offer lending relief quickly
As the krone strengthened, from nearly NOK 12 against the US dollar on Thursday to around NOK 11 by early Friday afternoon, Norwegian banks were being urged to show social responsibility and lower lending rates for customers accordingly. Several banks had already lowered some home mortgage rates for first-time buyers by 0.4 percent, but otherwise were slow to respond, other than to quickly reduce interest paid on savings. Nor will lending rate reductions take effect until next month.

“It’s important that the banks show some social responsibility now,” Ragnar Torvik, an economics professor at the Norwegian University of Sciency and Technology (NTNU) in Trondheim, told state broadcaster NRK. “Many companies and bank customer are in a liquidity squeeze right now, and will be hit hard by interest rates when their incomes fall.” Tens of thousands of Norwegians being laid off have had to apply for temporary unemployment benefits, with the total soaring to more than 110,000 by the end of this week.

“Helping these people is the intention behind the interest rate cut from Norges Bank,” Torvik said.

Economy had ‘continued to worsen’
The central bank’s committee itself noted how “the situation in the Norwegian economy has continued to worsen” since rates were cut by a half-point last week. “The measures to contain the spread of the Corona virus have led to a number of businesses having to close or reduce their activities,” the committee stated in its press release Friday morning. “The negative impact on the world economy is intensifying,” and at that point, oil prices had fallen further.

“Norway has room for economic policy maneuvers,” the committee noted, along with citing the country’s “good welfare arrangements and solid banks.” Committee members confirmed earlier reassurances from various commentators, economists and political leaders that Norway is better equipped to tackle the Corona crisis than many other countries.

“We are essentially well-positioned to face the prevailing crisis,” the committee stated. “Lower borrowing costs for existing and new loans can make it easier for Norwegian enterprises to weather a difficult period. This can also help households facing reduced income.

“When the containment measures are scaled back and the situation returns to normal, low interest rates can support a faster rebound in activity,” the committee stated on a more optimistic note.

Signs of that were already apparent heading into the weekend, given the stock market rebound, while the price of Norway’s most important export product, North Sea crude oil, jumped back up over USD 30 a barrel, at least temporarily. The bank concluded by noting that its Monetary Policy and Financial Stability Committee “does not rule out that the policy rate may be reduced further,” raising the possibility that interest rates can come down to at least near zero. Berglund



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