Central banks pursue different courses

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The European stock markets climbed around 10% during the first weeks of October. This surge slowed down a little last week. The principal cause was that the policies of the various central banks are not entirely clear. Corporate earnings were largely favourable, except in the oil industry.

We do not expect the US central bank to raise its policy rate this year Ben Steinebach Ben Steinebach Head of Investment Strategy

ECB President Draghi’s announcements from the previous week still echoed on, and in particular his confession that after a long time the possibility of lowering policy interest rates again (i.e. further into negative figures) had now explicitly been mentioned. That caused the interest rate forecast to drop as yet last week. We expect that a rate cut will be implemented in December, and likely will be timed to coincide with the announcement of a further increase in the bond-buying programme (from the present EUR 60 billion per month to EUR 80 billion). The Federal Reserve, in a surprise move, last week announced that the possibility of a US rate hike this year should not be excluded. Moreover, a comment about the uneasy international market conditions was removed from the statement released. Although this was unexpected, the response from the markets was not overly negative. The Bank of Japan announced that for the present it will not start buying back more bonds; however, this stimulus will presumably be offered next year.

Underperforming US economy renders rate hike unlikely

We do not expect the US central bank to raise its policy rate this year. Last week Thursday a Q3 economic growth of 1.5% (annual) was announced, falling considerably short of Q2’s 3.9%. This downturn was caused largely by the fluctuating business inventories, which fell as consumption grew sharply. While this might be corrected next quarter, business investments also showed a poor growth rate. This reflects the slow rate of growth for durable goods orders over the past months. Against this backdrop we feel that a rapid rate hike is not very probable. At the same time, however, the corporate sector is performing fairly well, in terms of both corporate earnings and movements in revenues, and seeing considerable activity in mergers and acquisitions.

Stock markets marking time

In the United States, Europe and Japan, the stock markets took a short rest last week following the rapid surges since late September. Interestingly the markets fell slightly in Europe (despite encouraging macro data) while the opposite was true in the United States. In the eurozone confidence among businesses and consumers continued to improve, against all expectation. In Germany, although business confidence slipped marginally, the sub-index showing the outlook for the coming six months continued to climb. The European region – despite its multitude of political and social problems – continues to compare favourably to other parts of the world in economic terms. Unlike the US stock markets, which rose slightly, the European markets fell a little. One factor causing this was the oil industry, where several companies (including Royal Dutch, BP and Total) presented much lower Q3 corporate earnings than they had a year previously. Their reports also revealed that many of these companies are being forced to write off vast sums on various projects that were launched when the outlook for oil prices was much more encouraging than is now warranted. As a result, prices in the oil industry fell short of the market average last week.

Encouraging corporate earnings for many sectors

Both in the international arena and in the Netherlands the corporate earnings published last week were fair to good. In the technology sector, Apple and Baidu (Google’s counterpart in China) drew most attention. Apple managed to raise its profits by more than had been expected, and the anticipated downturn in sales of iPhones in China failed to materialise. In fact, sales rose by 85% relative to a year before. Baidu’s revenue climbed by 35% to USD 3 billion, chiefly in China itself, where many people use their smartphones for searches. Chinese Internet retail company Alibaba showed similarly impressive figures.

The healthcare sector experienced an excellent week. Various companies (Novartis being the exception) published good to very good results, including Merck, Bristol Myers Squibb, Gilead Sciences, Pfizer, Amgen and Bayer. Pfizer and Allergan (the manufacturer of Botox, among other products) announced that they were in talks to explore the possibilities of a merger – although based in part on tax considerations, it should also yield considerable synergy benefits.

A number of Dutch companies announced their Q3 earnings last week. The figures of Heineken, Air France KLM and KPN in particular outperformed previous expectations. Randstad’s earnings, without being poor, were not impressive, yet investors rewarded the company by boosting the stock by 5%. Where the AEX had closed the previous week above 465 points, last week it was forced to give way slightly: by Friday morning it was recording a little over 462, down by 0.6%.

End of the earnings season approaching

Various earnings reports are expected this week. The most interesting macro news will be the sentiment among purchasing managers, for which provisional data has already been published. The chief focus this week will be on European banks: UBS, Z├╝rich International, Allianz and ING will announce their earnings, as will HSBC. They will be joined by interesting companies such as Walt Disney, Deutsche Telekom and Telefonica. In the Netherlands the results of companies such as NN Group, Arcelor Mittal, PostNL, DSM, Wolters Kluwer, BAM and TKH are eagerly anticipated.

Besides the macro data about purchasing managers, which presumably will be largely in line with the provisional findings, other important data will also be announced: September’s factory orders in the United States and in Germany and industrial output in Germany. This week will close with the traditional highlight: October’s job figures and unemployment data in the US. This should show whether the growth rate in that month outperformed the disappointing job figures for August and September.


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