Negative market sentiment given final push by Draghi

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Last week saw the financial markets slip back into pessimism. Although the sentiment had been somewhat bleak the entire week, it took a turn for the worse on Thursday following the announcement by President Mario Draghi of the ECB. However, it is doubtful whether this was entirely justified.

Het zijn vooral de opkomende markten in Latijns Amerika en Oost-Europa, waar de economische groeiperspectieven verslechteren. Ben Steinebach Ben Steinebach Head of Investment Strategy

During the early part of the week, most of the negative impact on the global financial markets was caused by the troubles in Hong Kong. Although the protests there are aimed chiefly at China and its desire to restrict a number democratic freedoms and bring them more closely in line with the situation in mainland China, the financial markets are concerned that the authorities will take these measures further and interfere with the freedom of the financial system.

The resultant sense of pessimism on the markets was made worse by a series of poor economic indicators from emerging markets and Europe. The economic growth prospects for the emerging markets in Latin America and Eastern Europe, in particular, are showing a downturn. Yet China too – and as a consequence the rest of emerging Asia – is unable to match the rate of growth from some years ago. Nevertheless, at 7% China’s rate of growth is more than acceptable, particularly coming on top of the significant increases in prosperity (improving by 9-11%) across several years.

The hardest blow to the sentiment on the markets came on Thursday, however, at the hands of President Draghi of the European Central Bank (ECB). As expected, he left interest rates unchanged and announced the commencement in the near future of a programme to buy up both asset-backed securities and covered bonds. However, no announcement was made of a large-scale programme to buy up government bonds (quantitative easing, or QE). Following the revelation earlier in the week that inflation in the eurozone had continued its fall to 0.3% in September (down from 0.4% in August), the general belief on the financial markets was that such a programme was essential: the markets for asset-backed securities and covered bonds are insufficient to give Europe’s economy the boost that it needs to properly counter the deflation.

We are not convinced that this is strictly necessary at this time, though. The economy is being helped somewhat by the falling euro, oil prices and interest rates. This should effectively render a QE programme unnecessary. Moreover, it is doubtful whether such a programme will have the same impact in Europe as in the United States. Another major risk is that the differences on the Executive Board of the ECB will harm the financial markets’ confidence in the ECB.

Nevertheless, the international stock markets fell last week, while bond prices climbed internationally as a result of the increased risk aversion.

Markets hampered by macro situation and Zalando

Europe’s stock markets lost more ground than their counterparts in the US. In Germany Zalando’s IPO was a fiasco. The flagging sentiment on the markets also affected Amsterdam: the AEX closed on 406.22 on Thursday, nearing the 400-points mark once more. Besides the protests in Hong Kong, another factor that adversely affected the stock markets was the disappointing macroeconomic data, chiefly from Europe, but also to a degree from emerging countries. One of the indicators affected was the sentiment among purchasing managers in Europe and China, which at 50.3 and 51.1 respectively in September came dangerously close to the ‘neither growth nor contraction’ level of 50.

In the United States, conversely, purchasing managers were unusually optimistic and the index climbed from an already high 57.1 in August to 59. However, consumer confidence in the US – as measured by the Conference Board – suffered a telling setback. By Thursday last week, the US stock indexes had fallen approximately 1.8% relative to the Friday before.
Two other events besides the outcome of the ECB meeting impacted the climate on the stock markets last week. The first was the stock market launch of Zalando in Germany. Floated at EUR 21.5, the stock initially climbed to EUR 24.5, yet a day later closed at EUR 19. As such, the IPO of this Internet business – like that of Rocket Internet, also in Germany – must be termed a failure.

The second event was Bill Gross’s move from PIMCO to Janus Global Capital. Concerns that the world’s largest bond fund will see much of its capital flow away caused the stock of Allianz (which owns PIMCO) to lose more than 6%. The European indexes fell between 3% and 4% last week relative to the Friday before; the 2.9% drop of the AEX to 406.22 points was at the lower end of that range.

Q3 earnings season to begin

The coming week will be considerably quieter than last week, particularly in terms of macroeconomic news. Although the season for corporate earnings begins next week, it will be a quiet start with only one company announcing its results. That company is US aluminium producer Alcoa, which traditionally kicks off the earnings season. Some US banks (primarily mortgage banks) generally follow shortly after, but this will not be until the week after.

Little excitement is expected in macroeconomic terms, certainly compared with the US employment and unemployment data for September that were published at the end of last week. The week’s most important data will come from Europe. We look forward to Germany’s industrial orders for August, where the spread between domestic and foreign orders will be a particular highlight. The United Kingdom, France, Italy and the Netherlands will release data about industrial production next week, which will help show where the economies of those countries stand. Lastly, Statistics Netherlands will announce September’s inflation on Thursday.


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