Slightly greater risk aversion

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The pattern on the international financial markets this week again points toward a tentative increase in risk aversion. The European stock markets in particular fell slightly and investors were somewhat more willing to venture onto the stock markets.

The European stock markets in particular fell slightly and investors were somewhat more willing to venture onto the stock markets. Ben Steinebach Ben Steinebach Head of Investment Strategy

The risk aversion was caused in part by the rising tension in the Middle East, as ISIS continues its advance in Iraq. In Ukraine too the failure to observe the armistice is causing tension. Another factor alarming investors was a series of incidental macro setbacks. On the whole, though, the macroeconomic situation was encouraging, although the downward adjustment of the US Gross Domestic Product for the first quarter (from -1.0% to -2.9% on an annual basis) came as something of a shock to some market observers. The similarly slightly disappointing performances of the European PMIs had been anticipated, however.

Conversely, the US purchasing managers showed themselves to be highly optimistic. This was one reason for Charles Plosser and James Bullard of the Federal Reserve (for St. Louis and Philadelphia, respectively) to bring forward their projections for the first interest increase to Q1 of 2015. The position of the US PMI (57.5 in June) reflects an annual growth rate of approximately 2.5%. Consumer confidence – as measured by the Conference Board – also showed a strong improvement in June, rising 3 points to 85.2. We expect that the Fed will not raise interest rates until mid-2015 at the earliest: Janet Yellen, Chair of the Federal Reserve, still sees some weaknesses in the labour market (long-term unemployment and more part-time jobs than there should be). The macroeconomic differences between Europe and the United States were visible in the movements on the markets: in the US they remained virtually stable at the record levels achieved previously, while in Europe they all closed somewhat lower than they started the week. The agreeable mood on most markets caused interest on bonds to fall by around 10 basis points: in Germany rates in fact approached the low level recorded in early May 2013, dropping to 1.24% for 10-year government bonds.

Takeovers not quite able to lift the markets

The European stock markets were more interested in the negative reports than any encouraging news. Takeover reports from the corporate sector buoyed the markets in the United States more than in Europe. The European PMIs fell slightly short of expectations, as did the German Ifo index, the best measure of business confidence. Yet these indicators were not in fact that poor: despite a small drop, they remain at comfortable levels. Only France displayed a worrying decline in the mood among purchasing managers, falling to well below 50 points, and the French economy in fact seems to be Europe’s economic problem child (today’s news confirmed that the economy had stagnated during Q1). The French CAC-40 recorded one of the steepest drops of the European stock indexes this week.

This is quite remarkable in light of the positive takeover news from France. Following a series of bidding rounds, Alstom has now accepted General Electric’s bid for the French company’s energy operations. The transaction has been approved by the French authorities. In the US, Oracle acquired Micros Systems for USD 68 cash per share. Micros Systems specialises in developing and selling integrated hardware and software for the hotel, restaurant and retail sectors. The total acquisition price came to USD 4.6 billion. The Netherlands saw an IPO earlier today: IMCD, a Rotterdam-based distributor of chemicals, will be floated at EUR 21 per share, which should raise EUR 460 million. The proceeds will be used to cut debt and give the company greater scope for further takeovers. The AEX in Amsterdam was unable to break away from the general pattern in Europe and fell 1.7% last week, closing at 411 points.

US job figures the week’s big news

Information about consumer confidence in the US (as published by the University of Michigan) will be released today. Next week the final PMI data and important data about European inflation will be published. Little news is expected in terms of corporate earnings. The season will gradually start midway through July, with aluminium producer Alcoa traditionally leading the way. Until then, the financial markets will have to make do with macro data, which will be in ample supply next week.

After today’s US consumer confidence data, the UK’s confidence figures for June will be published on Monday. The final data about the sentiment of purchasing managers will also be released sometime during the week, though these figures are not expected to differ greatly from the provisional data presented this week. The exception might be the mood among US purchasing managers, as the provisional data were published by UK firm Markit while the final figures will come from ISM (Institute for Supply Management). The markets will be looking forward to the publication of inflation rates in Europe on Monday, after the announcement of Germany’s June inflation this afternoon. This is particularly interesting in light of Thursday’s meeting of the European Central Bank and their announcements on this issue. The week will close with US labour market data for June. Expectations about the growth of employment are running high, with an anticipated increase by more than 200,000 jobs.


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