Europe’s markets were relieved as Mario Draghi, the president of the European Central Bank (ECB), hinted that the governing council is comfortable about action in June to tackle the threat of deflation. Both equity and bond markets rose in response.
Mario Draghi is comfortable about action to tackle the threat of deflation.
Ben Steinebach Head of Investment Strategy
Prices had been under pressure earlier in the week in the run-up to the Draghi press conference, due to growing tensions in Ukraine. But when Russia’s Vladimir Putin created an opening for diplomatic consultations On Wednesday, a ray of sunlight broke through on the equity markets. Janet Yellen, chair of the US Federal Reserve, also lightened the mood in the markets by noting the risks – i.e. geopolitics and the domestic housing market – facing the US economy in her address to Congress, which was taken to mean that it might be a while before the Fed moves on interest rates.
M&A activity steals the show
Macroeconomic sentiment aside, the equity markets were dominated by mergers and acquisitions and the release of first-quarter corporate results. To date, corporate America and Japan have done better than Europe. With 87% of S&P 500 companies’ results now out, 53% have exceeded their sales forecasts and 76% their profit expectations. In Japan, these percentages were 73% and 62% at a release percentage of 51%. The results picture is a lot more mixed in Europe: 77% of STOXX Europe 600 companies have now posted figures, with sales coming in higher than expected for 39% of them and profits for 48%. ING drew all eyes this week, as it had to report a loss of EUR 1.9 billion due to two major items. Quite a few European countries, including – once again – DSM, were adversely affected by a strong euro.
Mergers and acquisitions are on the up in several sectors of industry. Pharmaceuticals is seeing the briskest activity, with Bayer bagging Merck’s generics division and Pfizer attempting to take over Astra Zeneca. General Electric’s bid to acquire France’s Alstom made waves, not least because the French president François Hollande personally intervened, fearing the loss of French jobs. The Dutch AEX Index breached 400 to 402.98 on Thursday, mainly thanks to the markets’ positive take on Mario Draghi’s comments.
Downward pressure on yields continues
In the fixed-income arena, Southern European yields contracted markedly and spreads tightened further, as German 10-year yields hardly budged. Italy and Spain saw 10-year yields lose over 10 basis points in this past week and dip below 3%, bringing the spread over German bunds to around 1.5 percentage points compared with 2.2 percentage points at end-2013. In view of the improvements gradually becoming visible in both countries’ economic structures, we reckon the yield spread could narrow further to around 1.1%. Bond markets are upbeat on the expectation that the ECB will take action to ward off deflation and reduce the strength of the euro.
Yellen’s words played out the same way in the United States, as interest rates are now expected to stay low for quite some time yet. Corporate yields also edged down, tightening spreads over government bonds with similar maturities. Surprisingly, higher acquisition activity hasn’t pushed up bond loan rates at acquiring companies – normally quite common, as takeovers are typically leveraged.
A slew of macroeconomic data ahead
The results season is gradually drawing to a close and the financial markets are back to eyeing macroeconomic data. Outside the Netherlands, we’ll be looking out for profit releases by Cisco, Wal-Mart, Allianz and Zurich Insurance Group, while Boskalis, BAM and Imtech are slated to publish trading updates and Aegon is yet to post its first-quarter results.
At the macroeconomic end, Mario Draghi’s hints will prompt us to pay closer attention to final EU inflation data than we might normally have done. A smattering of individual EU countries (France and Italy) as well as the United States are due to publish their April inflation figures. Also slated for this week: retail sales in the US (and the Netherlands) and industrial production data for the US and the EU. The end of the week should bring a preliminary take on American consumer sentiment in May (by Michigan University) and on business sentiment in the Philadelphia area (in the shape of the Philly Fed Index).