Leo de Jong, deputising for Ben Steinebach The mood on the markets this week was more upbeat than the week before. This was less because problems had gone away and more because investors had shifted their focus. On balance, the AEX closed the week about a percent higher.
This week investors seemed more concerned with macroeconomic data and corporate earnings.
Ben Steinebach Head of Investment Strategy
The geopolitical worries discussed last week remain. The situation in the Middle East (and particularly Gaza) shows no signs of improving, and recent developments in Ukraine/Russia similarly offer little cause for optimism. Nevertheless, this week investors seemed more concerned with macroeconomic data and corporate earnings, of which there were again plenty. The diminishing risk aversion was also noticeable in other investment categories. Gold fell approximately 2%, for example, and oil prices also dropped slightly. Ten-year interest rates rose very slightly this week, both in the US and in Europe. On balance, though, interest rates refuse to climb much and this situation will presumably not change until investors see more proof of economic recovery and the central banks phase out their stimulus measures. We expect that US interest rates will lead the way, followed by interest rates in Europe.
This week’s macroeconomic news mostly concerned purchasing managers indexes (PMIs). Europe surprised the market by reporting a PMI that visibly outperformed the forecast (54.4 versus 52.7). The Services subsector in particular exceeded expectations. At 52.0, the PMI in China was also better than predicted (51.0). The PMI published in the US fell slightly short of the forecast; nevertheless, at 56.3 it remains comfortable. All in all these data bear out our view that the global economy continues to recover
Quarterly earnings: no cause for food & beverage to celebrate
Reports of earnings continued to come this week. A noticeable trend was that the listings of various food & beverage companies fell, if only slightly. There was some good news too, though. Coca-Cola, McDonalds, Unilever and Starbucks – all of them companies that deserve a place in a solid long-term portfolio – failed to impress investors with their quarterly reports this week. For example Coca-Cola fell around 2.5% after announcing its earnings and McDonalds dropped by 1.5%. Unilever closed more than a percent lower and coffee chain Starbucks, which published its quarterly earnings after close of market on Thursday, fell almost 3% in the after-hours trading. There was positive news too. ReedElsevier’s earnings might be solid, but they also held few surprises. Nevertheless, investors were happy and rewarded the stock by boosting it by nearly 4%. Philips’s earnings were largely as expected and the company’s stock showed little movement.
Euro drops below 1.35 against the US dollar
This week the euro (EUR) fell to less than 1.35 against the US dollar (USD), reaching its lowest point since November last year. For a while now we have been expecting the dollar to climb against the euro, and we have several reasons to believe why this trend will continue. There are arguments that both the euro will weaken and the dollar will improve. The easing measures introduced by the European Central Bank (ECB) have changed the playing field for the euro. The negative interest means that the euro is now less attractive to foreign investors, and we believe that the pressure on the euro will continue. By year-end we expect a EUR/USD exchange rate of 1.30. We also believe that the US dollar will do well. First, our forecasts for the US economy are above-consensus. We also expect that the US Federal Reserve will begin to raise interest rates somewhat earlier in 2015 than the market currently believes. Both these developments should boost the USD exchange rate.
Next week’s corporate earnings
Next week the markets will again be flooded with reports of corporate earnings. We will discuss a few of the companies here that will report to investors next week. We also take a look ahead to the most important macro data. Quite a few Dutch companies will be presenting their earnings next week. For example, we expect reports by TNT Express and Arcadis on Monday, KPN, Wolters Kluwer and USG People on Wednesday, Randstad on Thursday and Arcelor Mittal on Friday. The week will also be dominated by the major oil companies: expect the earnings of BP (Tuesday), Total (Wednesday), Royal Dutch Shell (Thursday), ExxonMobil (Thursday) and Chevron (Friday). Other companies that will publish their earnings next week include Merck, Pfizer, Deutsche Bank, UBS, Sanofi, BNP Paribas and Siemens.
Next week’s macroeconomic agenda next week is visibly tilted toward the United States. The decision about interest rates will again be widely discussed, in particular the commentary by the Fed. The monthly US unemployment data will also be published next week, traditionally on Friday. They will be preceded by the employment data of payroll processor ADP on Wednesday.