With the uncertainties about the results of European general elections behind them, the markets are returning their attention to macro-economic outlooks in various regions. These are on the whole positive, with share prices rising and bond yields declining.
The markets are returning their attention to macro-economic outlooks in various regions.
Ben Steinebach Head of Investment Strategy
Although the balance of power in the European parliament has not shifted too drastically, the poll results varied considerably from country to country – and so did the analyses of these results. In France, where the Front National became the biggest party, President Hollande stated that deficit reduction and reforms will temporarily have to move down the priority list. In Spain and Italy however, the ruling parties (Rajoy and Renzi) did manage to win the majority of votes, allowing them to continue their reforms. In Germany, Angela Merkel again received a mandate from her voters, and in the Netherlands, just two seats changed hands. Only in Greece is there a risk that Syriza’s triumph might slow down efforts to further improve government finances.
The financial markets were unperturbed and, supported by positive economic data, stocks continued their upward trend almost everywhere – and so did the purchasing managers’ indices in most countries. The European sentiment indicator, too, posted gains in May that amply offset April’s losses.
In April, US durable goods orders continued March’s uptrend, and unemployment claims decreased in the course of May. The only bad news is that in 2014Q1 the US economy apparently contracted by 0.25% (1% annualised) compared to the previous quarter. Unlike the other indicators mentioned (which are more recent), this figure is strongly distorted by the severe winter weather. Besides, a closer analysis shows that consumer spending and investment have shown satisfactory growth, and the main underlying causes of GDP contracting are inventory falls and reduced investment in industrial premises. These figures are related to transport and construction, which have been negatively impacted by the cold winter.
Another positive figure was money supply growth in the eurozone. Although it was lower than expected, the fall in lending to small and medium-sized businesses is bottoming out.
Markets setting records
With Ahold being the last Dutch company to publish its first quarter results, the earnings season has come to a close. Investors are shifting their focus to other sentiment-defining factors. Apparently these are positive, as the stock markets are reaching new highs, with some even setting all-time records. Ahold’s results can definitely be called weak. Although its sales and market share remained stable, operational results fell by 6% to 392 million euro. The sector in which Ahold operates is characterised by fierce competition. The only segment with growth potential is online sales, where the company managed to realise 20% growth. Ahold shares lost nearly 5% in the past week.
These losses occurred during an otherwise generally positive week on the stock markets. Although tensions within Ukraine have intensified in the past week, until now this has not led to any significant further deterioration in the relations between Russia and the West. So it seems as if positive macro data are the only news guiding the markets. The American S&P-500 and the German DAX-30 are examples of indices that reached all-time highs, although of course the AEX did not (in 2000 – when the composition was different - it reached a level of just over 700 points). But the Dutch index, too, was able to establish itself well over 400 points, on Friday morning moving towards 408 points.
International stock markets are looking forward with some anticipation to the end of the next week. On Thursday the European Central Bank (ECB) will likely take monetary stimulation measures, and on Friday the US job market figures for May will be published. Undoubtedly these two events will heavily influence the markets next week.
On bond markets European elections quickly forgotten
The fixed-interest markets mirrored the positive sentiment seen on the stock markets. Bond yields declined across the board and especially in the European periphery. The steep fall of yields in the European periphery followed soaring yields in the two weeks prior amid concerns about the European election results, which could lead to less emphasis on economic reforms and reconstruction of government finances. Additionally, there were some rumours about the introduction of capital gains tax in Greece, with other Southern European countries possibly following suit. Although Syriza’s triumph in Greece is slightly worrisome, the prime ministers of Spain (Rajoy) and Italy (Renzi) did receive a mandate for continued reforms. This news promptly reversed the rise in yields during the two weeks before the elections.
Even though German ten-year yields also continued falling (to below 1.4%), the spread to Southern European countries narrowed to 130-140 basis points (bps) as opposed to about 150 bps before the elections. Based on the bright outlook, we think a spread of 110-120 bps is justified. That is the reasoning behind our positive view on Southern European loans. That goes for corporate bonds as well, including high yield bonds. In light of our optimism regarding the macro-economic environment and related decline in default rates, we feel that the somewhat higher risk is justified.
A few interesting macro events ahead
For the upcoming week, we are not expecting any corporate news in terms of business results. However, on the macro front a few interesting events are in the pipeline. In the first place, early in the week the final purchasing managers’ index figures will be published. As provisional data was positive for most countries, major adjustments are not expected.
The most interesting news is to be expected on Thursday and Friday. As stated above, on Thursday the Governing Council of the ECB will meet (as will the BoE’s Governing Board, by the way). We are expecting the ECB governors to decide to lower both deposit and refinancing rates by 0.15 percentage points, to -0.15% and 0.1% respectively. Additionally, they could well announce a limited purchasing programme of (possibly securitised) corporate debt. By doing so, the ECB would meet expectations and appeals on the financial markets to boost lending to SMEs in particular.
Furthermore, German data over April on industrial orders (both domestic and international) will be announced. And on Friday, US figures on employment and unemployment will be published. Then we will see whether the strength witnessed in March and April will continue in May.