Financial Markets
The dollar appreciated against the euro and the yen in 2000. However, the euro strengthened generally towards
the end of the year.
The official interest rates of most industrialised countries rose during the year, whereas long-term interest rates
fell. The decrease can be attributed primarily to a dampening of global growth towards the end of the year, but
also a reduced need for new government bond issues in several countries.
The international stock markets were characterised by substantial fluctuations in prices for IT stocks and the
year closed with significant price drops. The broad indices closed with a more moderate decline.
Foreign-exchange markets
During 2000 the dollar strengthened by approximately 7 per cent vis-à-vis the euro. The dollar has risen by a good 20
per cent against the euro since the introduction on 1 January 1999, cf. Chart 19. The strengthening is related to stronger
growth in the USA than in the euro area. European business enterprises' net acquisitions of US companies, and net
portfolio investments from Europe to the USA also contributed to the dollar's strengthening.
Chart 19 Euro vis-à-vis dollar and yen
| Note: |
Weekly observations. |
During the autumn the ECB, and in one instance also other central banks, intervened in support of the euro, cf. p. 45f.
Together with indications of dampened growth in the US economy this significantly strengthened the euro against the
dollar from the end of October to the beginning of January 2001. During this period the euro also strengthened against a
number of other currencies.
The exchange rates of the major currencies fluctuate considerably over time, and the fluctuations between the dollar and
the euro in 1999 and 2000 are thus not of any great magnitude.
The Japanese yen weakened particularly towards the close of 2000 against both the euro and the dollar. The currency
weakened since the upswing in Japan is still fragile, especially in view of the weak private consumption.
At the end of 2000 the exchange rate for sterling against euro was at the same level as at the beginning of the year, cf.
Chart 20. Sterling thus did not follow the dollar as closely as before. Sterling's weakening against the dollar was
attributable to the strong US economy in the first half of 2000.
Chart 20 Swedish krona, norwegian krone and pound sterling vis-à-vis Euro
| Note: |
Weekly observations. |
During the year the Norwegian krone was almost unchanged against the euro. The Swedish krona weakened by 3 per
cent against the euro in 2000, reflecting a strengthening during the first four months of the year, followed by a weakening
in the remainder of 2000. This trend is related to such factors as price trends for technology stocks, cf. p. 53ff, in view
of the large number of high-tech companies in Sweden. The weakening against the euro since end-October should also
be viewed in the light of the relatively low Swedish short-term interest rates compared to the euro area, as well as
Swedish portfolio investments abroad and the general strengthening of the euro.
Interest rates
The official interest rates of most industrialised countries rose during 2000, whereas long-term government-bond yields
fell, cf. Chart 21. By the end of 2000 the yield curve had levelled off in the USA and Germany. This may reflect market
expectations of monetary-policy relaxations.
Chart 21 Changes in term structures in Germany and the USA
| Note: | The yield curves are based on yields to maturity. |
During the first half of 2000 the Federal Reserve of the USA raised the federal funds target rate by a total of 1 per cent
to 6.5 per cent. This is the highest level since the beginning of 1991. The interest rate was raised in view of the risk of
rising inflation as a consequence of strong growth in the US economy, a tight labour market and rising energy prices.
The considerable dampening of the economy towards the end of the year caused the Federal Reserve to lower the
federal funds target rate on two occasions during January 2001 by a total of 1.0 per cent to 5.5 per cent. In 2000 the
yield on 10-year US government bonds fell by 1.3 per cent to 5.2 per cent at year-end, cf. Chart 22. This decline can
be attributed to the slowdown in the US economy towards the end of the year, as well as a reduced requirement for
issue of US government bonds, cf. Box 3, as well as stock-market volatility.
Chart 22 10-year government-bond yields
| Note: | Weekly observations. |
Box 3 Reduced government financing requirements
In recent years a number of industrialised countries, with Japan as a notable exception, have significantly improved their
government budgets. This has reduced the supply of government bonds and thereby contributed to falling long-term
interest rates. Furthermore, the financing requirements of several European countries were influenced in 2000 by
extraordinary receipts from the sale of UMTS licences (transmission licences for third-generation mobile telephony). In
Germany the sale of UMTS licences thus generated receipts of more than euro 50 billion or approximately 2.5 per cent
of GDP. However, the receipts from UMTS licences vary considerably among the individual countries.
| |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
| USA |
-3.1 |
-2.2 |
-0.9 |
0.3 |
1.0 |
2.3 |
| Japan |
-3.6 |
-4.2 |
-3.3 |
-5.0 |
-7.0 |
-6.0 |
| Germany |
-3.3 |
-3.4 |
-2.7 |
-2.1 |
-1.4 |
1.4 |
| UK |
-5.8 |
-4.4 |
-2.0 |
0.4 |
1.3 |
2.7 |
| Denmark |
-2.3 |
-1.0 |
0.5 |
1.2 |
2.8 |
2.7 |
| Source: |
OECD Economic Outlook No. 68, November 2000. |
Throughout 2000, 10-year yields in Japan fluctuated within a narrow range, just below 2 per cent. The low level
reflects weak growth and deflation. This overshadowed the substantial government bond issues. In the first two months
of 2001 long-term interest rates decreased by 0.3 per cent to 1.4 per cent. In August 2000 the Bank of Japan decided
to raise the benchmark interest rate by 0.1 per cent to 0.25 per cent, which ended the "zero-interest-rate policy"
whereby the leading interest rates were kept close to zero. The background to the increase was the slightly more
positive prospects for the Japanese economy. In February 2001 the Bank of Japan lowered the benchmark interest rate
by 0.1 per cent to 0.15 per cent, in view of the dampening of economic activity in Japan, as well as falling stock prices,
continued deflation and the slowdown in global growth.
In the euro area the ECB in 2000 raised the interest rate for the main refinancing operations by a total of 1.75 per cent,
cf. p. 45. The yield on the benchmark 10-year German government bond fell by 0.5 per cent to 4.9 per cent at the
close of the year. This can be attributed to the lower financing requirement in the euro area member states, cf. Box 3, as
well as falling interest rates in the USA, and a moderate dampening of growth in the euro area towards the end of the
year, in view of factors such as the higher official interest rates and rising oil prices.
In the UK the Bank of England in January and February 2000 raised the base rate by a total of 0.5 per cent to 6.0 per
cent on the grounds of high capacity utilisation and accelerating growth. In February 2001 the Bank of England lowered
the base rate by 0.25 per cent to 5.75 per cent, primarily due to low inflationary pressure. The yield on UK 10-year
government bonds declined by 0.6 per cent to 4.9 per cent in the course of the year and in several periods was below
the yield for equivalent German government bonds, cf. Chart 22. The decrease is related to moderate inflation and a
reduction of government bond issues as a consequence of an improvement in government finances. The strong demand
for long-term government bonds from pension funds and life assurance companies contributed to the decline in
long-term interest rates, cf. Box 4.
Box 4 The impact of interest-rate guarantees on long-term interest rates
Pension funds and life assurance companies in a number of European countries are committed to paying a minimum
return to their customers, i.e. an interest-rate guarantee. This guarantee has become more and more important in recent
years, in view of the declining trend in global interest rates. The pension funds and life assurance companies need to
place funds in long-term bonds in order to hedge the risk associated with this commitment. Furthermore, the method of
calculating the solvency ratio has been adjusted in some countries, which has increased the placement requirement in
long-term securities, and thereby demand for long-term bonds. The strong demand contributed to the decline in
long-term interest rates. This was the case particularly in the UK, where long-term interest rates (30-year) are very low,
but the trend was also seen in Denmark.
Development in interest rates in Denmark
In Denmark yields in the bond market followed the trends in the euro area during 2000. The Danish yield curve had
thus also levelled out by the end of the year, cf. Chart 23.
Chart 23 Danish bond market, term structure of zero-coupon rates
| Note: |
The zero-coupon rate is the yield to maturity on a bond with only one payment. The zero-coupon rate is a unique
measure of the yield for the individual maturities. In general, it is not possible to observe the zero-coupon rate, which
must instead be estimated. |
Yields on 10-year government bonds had fallen by 0.5 per cent to 5.2 per cent by the end of the year. The 10-year
yield differential to Germany fluctuated in the range of 0.30-0.55 per cent during 2000, cf. Chart 24. The moderate
fluctuations in the yield differential both before and after the referendum on Denmark's adoption of the euro reflected
sustained confidence in the Danish economy and the fixed-exchange- rate policy. At end-2000, Denmark's yield
differential to Germany was lower than those of e.g. Belgium and Italy, the primary reason being that the government
debts of Belgium and Italy are significantly higher than Denmark's debt.
Chart 24 10-year government-bond yield differentials to Germany
| Note: | Weekly observations. |
The decline in government-bond yields during 2000 affected the Danish mortgage-credit market to some degree. The
extent of re- mortgaging of mortgage-credit bonds is described on p. 58f.
In 2000 the Association of Danish Mortgage Banks began to publish average yields for respectively new 30-year
mortgage-credit-bond issues and mortgage-credit bonds with a maturity of 1-2 years, cf. Chart 25. The average yield
for short-term mortgage-credit bonds had risen by approximately 1 per cent by the end of 2000. The spread between
the two average yields peaked in the autumn of 1999, but has since narrowed considerably, in line with the trend in the
government securities market. The levelling-out of the yield curve has reduced the immediate advantage of financing at
variable interest rates.
Chart 25 Yield averages for new mortgage-credit bond issues
| Note: | Weekly averages. |
| Source: | The Association of Danish Mortgage Banks. |
Prices for Danish index-linked bonds fell in connection with first the publicity concerning the government's proposal to
restructure the taxation of pension yields, and then the publication of the bill, cf. p. 62. The background to the decline is
that the after-tax yield on other bonds will be increased relative to index-linked bonds issued prior to 1 January 1999.
Stock markets
2000 was a turbulent year in the global stock markets, and prices for particularly IT stocks fluctuated considerably.
Overall for the year prices for IT stocks declined, after strong price increases for several years. The US Nasdaq index,
with an overweight of technology stocks, thus fell by 39 per cent in 2000, while the broad-based Dow Jones and S&P
500 indices, with smaller proportions of technology stocks, closed the year with more moderate price decreases, cf.
Chart 26. The general uncertainty concerning IT stocks led to day-to-day fluctuations in the Nasdaq index: nine of the
ten largest percentage increases so far in Nasdaq's 29 years of existence thus took place in 2000, as did four of the ten
strongest percentage drops so far.
Chart 26 Stock indices, USA
| Note: |
Weekly observations. |
The Nasdaq index rose in the first months of the year, and reached its highest level so far at the beginning of March.
However, continuing strong economic indicators for the US economy and prospects of further measures to tighten
monetary policy drove investors towards other sectors in the stock market traditionally associated with less risk. This
led to strong price drops for IT stocks as from the end of March.
This decline gained further momentum from the beginning of September, and by the end of December the Nasdaq
reached its lowest level in 2000. The prospects of a slowdown in the US economy, with greater pressure on business
earnings, as well as the continued risk of rising inflation – primarily due to the tight labour market and high oil prices –
were the main factors contributing to the decline in the autumn.
The falling price trends for IT stocks continued in 2001. By the end of February the Nasdaq index had thus dropped by
13 per cent against the level at the end of 2000.
The same pattern was apparent in Europe. The Neuer Markt index, which has an overweight of IT stocks, fell during
the year, while the more broadly based indices were virtually unchanged, cf. Chart 27. Stocks in telecom enterprises
also dropped. The European telecom sector was subject to pressure due to the surge in costs for third-generation
mobile telephony licences and a growing need for ongoing expansion and consolidation. In the European Dow Jones
Euro Stoxx index the telecom sub-index thus accounted for the strongest decline among all sub-indices in 2000.
Chart 27 Stock indices, Europe and Japan
| Note: | Weekly observations. |
Besides the falling technology stock prices the Japanese stock market was influenced by events related to the financial
sector. A large retail chain went into liquidation during the summer, which heightened concern about the financial
situation of the Japanese banks.
Among the Nordic countries the stock markets of Finland and Sweden were particularly affected by the price drops for
technology stocks. This can be attributed primarily to the very high weighting of respectively Nokia and Ericsson stocks
in the Finnish and Swedish indices. The Danish KFX index, which has a relatively small proportion of technology
stocks, yielded the highest return among the Nordic indices in 2000, cf. Chart 28. Trends in 2000 were thus in striking
contrast to 1999, when especially the Swedish and Finnish stock indices performed significantly better than the KFX
index.
Chart 28 Stock indices, Nordic countries
| Note: | Weekly observations. |
On 1 September the Copenhagen Stock Exchange introduced the KVX index of growth companies, primarily in the
technology sector. The global decline in prices for technology stocks also affected the KVX index, which had dropped
by 37 per cent by the turn of the year.
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