Financial markets worldwide were generally optimistic this past week, with prices rising on both the equity and bond markets. The only dissonant chord was the US equity market, where prices on Thursday had edged down from the previous Friday.
US equities decline despite better figures
Ben Steinebach Head of Investment Strategy
Tensions between Russia and the West are still making their mark, but investors seem to be assured that, despite the verbal aggression between Putin and Obama, the situation will not escalate to East Ukraine, Moldavia or other countries in the region. With a badly suffering economy, Ukraine can now count on $27 billion in support from the IMF. Investors in the eurozone were looking more on the bright side last week. Although the mood among purchasing managers deteriorated slightly, it didn’t plummet and the PMI index remained in positive territory, above 50. Germany’s Ifo business climate index also declined somewhat, undoubtedly in response to tensions relating to Crimea, but the index is still at a very comfortable level. The United States this past week published positive figures on the job market (number of unemployment recipients) and on consumer confidence (by the Conference Board). Unlike the situation reflected in the Ifo index, US consumer confidence is still relatively low. Orders for sustainable goods rose more sharply than expected in February (2.2%) despite the severe winter, mainly on the growth of orders for vehicles. But this can hardly explain the limited decrease in US equity prices. I believe the decline can better be explained by the fact that five banks which are supervised by the Federal Reserve failed the stress test. Citigroup, Royal Bank of Scotland, HSBC and Santander do, however, have the opportunity to adjust their capital plans in order to obtain approval, something Goldman Sachs and Bank of America had already done.
Emerging countries’ markets show steepest rise
European equity markets shook off more of the Ukraine-related anxiety and notched up gains between 0.5% (United Kingdom) and almost 2% (AEX). Markets in emerging countries (2.3%) and especially those in Latin America (5.1%) rose even more steeply.
US markets were the losers this past week. The widely diversified S&P 500 index came down by 0.9% and the Nasdaq technology market lost even 2.9%. There was hardly any guidance to be gained from business news, although Microsoft announced plans to make its Office package iPad-compatible. In doing so, the new CEO Satya Nadella – Steve Ballmer’s successor – implicitly conceded that Microsoft hasn’t successfully made the shift to mobile. Estimates for how much additional revenue this move will bring in for the world’s most dominant software package range widely from $1-7 billion, or 2-5% of total sales. Microsoft’s share price is now at a ten-year high, despite its being referred to by some as a ‘weak brother’ in the sector. There was also little news on Dutch companies this past week. The AEX closed off Thursday at 398.59, up 1.8% on the previous Friday. This morning the index rose to just above the 400 mark.
Interest rates still under pressure
Long-term interest rates are moving within a narrow bandwidth. Declining inflation is exerting downward pressure on government bond yields, bringing down yields on corporate bonds as well, helped by high demand for new bond issues.
Lower inflation in many countries is feeding the fear of deflation, which in turn is putting pressure on government bond yields. In Europe, the yield curve for all maturities is falling equally, but in the US the yield curve is flattening because short maturities are inching up based on the belief that the Federal Reserve will raise its rates sooner than expected. Deutsche Bundesbank president Jens Weidmann said he isn’t necessarily against an ECB bond-buying programme (provided public debt isn’t financed by the central bank), a statement that added to the downward pressure on yields. The outlook for corporate bonds remains good, thanks to upbeat expectations for the global economy, the positive fundamental development in the business world and the favourable issuing climate in which new loans are easily absorbed by the market. We therefore see room for further narrowing of the spread with government loans.
All eyes on US employment data
The focus in the week ahead will remain on macroeconomic indicators. We don’t expect any planned business news now that the results season is over and first-quarter figures won’t be published for another three weeks.
This week the spotlight will be grabbed by the US job market and the interest rate meeting of the European Central Bank (ECB). The big question is whether the US job market has managed to shake off the effects of the severe winter. If so, the number of jobs would grow by 200,000 and unemployment would fall to, or below, 6.5% of the total workforce, a level the Federal Reserve recently announced as the boundary for interest rate hikes. The ECB’s meeting is interesting because we could see some signs of a change in policy, although it is presumably too soon for this. The week ahead will also see a load of data on inflation in several countries and on factory orders in Germany.