Draghi's words influence bond markets

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Mario Draghi

The international financial markets presented a mixed picture, both regionally and in the course of the week. Investors once again became more risk-averse in the second half of the week in particular, causing a decline in bond yields in the European core countries and the United States.

Investors once again became more risk-averse in the second half of the week Ben Steinebach Ben Steinebach Head of Investment Strategy

Although global markets came under pressure mid-week, European equity markets on average performed better than US markets this past week. Markets in the European countries accurately reflected economic developments, with prices rising in Germany and the United Kingdom and falling in France and the Netherlands. Outside of Europe, Japan’s market benefited on balance from the strong economic growth posted in the first quarter of the year.

Yields in many countries have continued to fall, partly in response to ECB President Marion Draghi’s suggestion that he might take measures in June to fight deflation. 10-year  rates in Europe consequently came down to levels seen a year ago. That was when former Federal Reserve Chairman Ben Bernanke started talking about reducing monetary stimuli, and yields in the US and Europe shot up. It should be noted that US interest rates are still more than half a per cent higher than they were at the time. Yields in the peripheral eurozone countries reflected this past week’s heightened risk aversion, rising 10 to 20 basis points and causing the spread between Southern and Northern Europe to widen.

News flow sends ambiguous signals to markets

The risk aversion experienced on the international equity markets can be explained only partly by tensions between Russia and the West. The varied macroeconomic figures published last week presumably played a larger role. Incoming business results were also varied. The US reported largely favourable macroeconomic figures. In fact, growth of manufacturing in April was the only slightly disappointing figure, and the 2% rise in inflation caused frowns. The latter had more to do with the price decrease that took place in April 2013 than with the pace of increase seen in April of this year (+0.3% compared with -0.4% a year ago). The decline in manufacturing  can be qualified if we consider the sharp growth in the previous two months (1.4% and 0.9%). There were also positive figures on the number of unemployed and, on closer inspection, the first figures on the economy in May – both the Empire State Manufacturing Index and the Philadelphia Fed Index – were favourable.
Europe’s published indicators, however, were negative, with disappointing first-quarter economic growth (0.2% in the eurozone; 0.4% was forecast). The main reason was stagnation in France and Italy and contraction in the Netherlands (-1.4%) due to lower gas sales at home and abroad (caused by the mild winter) and earlier car purchases due to tax amendments that took effect on 1 January. Strong growth in Germany (+0.8%) failed to sufficiently offset these developments. Asia produced mixed signals too, pointing to a (slight) further weakening of the Chinese economy and strong underlying economic development in Japan.

The results season is approaching an end, but there were still a few interesting developments. Aegon, for instance, reported good results, but was not rewarded in its share price. BAM posted disappointing results, however, but it did enlarge its order portfolio and Boskalis’s results looked solid despite delays in the salvage of the Costa Concordia. Disappointing news in the US came from Wal-Mart, which is suffering due to the location of its megastores far outside city centres and due to competition from online retailers.

Results season well and truly over

The last of the corporate results will be published in the week ahead, but guidance on the financial markets will have to come from macroeconomic news. Companies presenting their results in the coming week include the US’s Home Depot and Britain’s Vodafone; Vastned Retail will also issue a trading update (interim statement). It isn’t set to be a particularly busy week on the macroeconomic front, with the most interesting news being the figures to be published this Friday on business confidence in Germany and Belgium. Germany’s Ifo Index is generally regarded as the standard, but experts consider the Belgian business confidence index published by the national bank of Belgium to be a good indicator of European business confidence. Besides this data, various figures will be announced this week on inflation in April (United Kingdom and Germany), consumer confidence in the EU in May and the mood among purchasing managers in May in the world’s leading countries.


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