The correction on the financial markets continued last week. Prices of stocks and bonds fell and interest rates climbed, while oil prices and the euro also both continued their rise.
The macroeconomic indicators published last week had little impact
Ben Steinebach Head of Investment Strategy
This turbulence was initially ascribed mainly to the difficult negotiations with Greece, while the disappointing Q1 economic growth data in the US amplified the problems. However, the present correction goes beyond these factors, and is manifesting itself across all the important markets. The reason presumably lies in the rising interest rates. The 10-year yield in Germany increased from 0.36% to 0.7% last week, while the corresponding rate in the United States climbed from 2.04% to 2.18%. However, Germany’s 10-year yield was as little as 0.07% on 21 April, and the present level of 0.7% was last achieved early in December 2014, before the European Central Bank (ECB) first hinted at its bond-buying programme. In some quarters the rising interest rates have been connected to the desire to offload bonds among investors: these securities are deemed too expensive, and the ECB’s bond-buying programme (EUR 60 billion per month) apparently does not outweigh the price. The rising inflation forecasts, which are linked to rising oil prices (up to almost USD 70 per barrel), presumably form another factor. However, we do not expect that this heralds the start of a significant increase in interest rates, as the ECB is still buying sufficient bonds every month. In any event the higher interest rates have buoyed the euro, but also caused stock prices to fall. On balance, the United States markets experienced a drop in stock prices by 1% (S&P 500), while the European markets generally fell even further (between 1.4% and 2%). The macroeconomic indicators published last week had little impact, although the markets were disconcerted by Fed Chairwoman Yellen’s remark that the stock markets are somewhat overvalued. It is unclear as yet what the reaction will be to the general election in the United Kingdom. For the coalition government, the resounding victory of David Cameron’s Conservatives is more than cancelled out by the staggering loss of Nick Clegg’s Liberal Democrats. Labour was unable to profit from those defeats, itself losing large numbers of seats in particular to the nationalists in Scotland and Wales. David Cameron has by now formed a new government and will need to make good on his promise to hold a referendum about the future of Britain’s membership of the European Union.
Corporate earnings on the up
The anxiety on the stock markets cannot be attributed to the corporate earnings that were published, and the macroeconomic news from Europe was also largely encouraging. The markets appeared to be bouncing back on Friday morning. The sentiment among Europe’s purchasing managers in the services sectors in April, as published last week, remained at more or less the same level as in March, and slightly outperformed the provisional data published earlier. The industrial orders received in Germany also performed as expected, climbing almost 1% in March, which offers some encouragement. Looking at all the companies that published their Q1 earnings last week, the results of most were positive, and in many cases in fact outperformed the consensus forecast. Among the big multinationals, only Siemens presented mixed earnings, though it also declared that the outlook for the remainder of 2015 is favourable. In the Netherlands PostNL fell short of expectations, announcing a 20% drop in its underlying earnings (EBIT). In our view Q1 is not truly representative of the year as a whole, and the company will be able to make good this drop as the year progresses. Although the earnings presented by Nationale Nederlanden (NN Group) appear solid enough at a glance, this stems largely from a higher profit at Japan Life. As it will be difficult to carry this positive contribution forward throughout the remainder of the year, some disappointments might ensue. Most other earnings were good or very good, both in the international arena (such as BMW, HSBC, Kuka, Anheuser-Busch and Adecco) and domestically. In the Netherlands ING, Aperam and TKH published very strong earnings. The AEX closed at 478.78 on Thursday, down 1.9% relative to the Friday before on balance. By Friday morning the index had bounced back to 482 points.
Attention to shift back to macro news this week
Although the earnings season is not entirely over, the principal companies have published their data and the focus will now shift back more to the macro economy. The week begins with a meeting of the Eurogroup, under its President Jeroen Dijsselbloem. The finance ministers will attempt to convince Greece to implement further reforms and austerity measures. However, Germany’s Minister Schäuble has announced that he does not expect any breakthrough yet this week; at the same time, though, he believes that the negotiations are being conducted in an improved and more constructive mind set. Some important countries are set to publish data about their industrial output: the United States and China (for April) and the United Kingdom and the eurozone (for March). Adjusted data about the Q1 economic growth in Europe will also be announced. Japan is set to present its leading indicator, which potentially shows whether or not the Japanese economy is mending after its period of relative weakness. In addition to data about movements in its industrial output, China will be releasing data about capital expenditure and retail sales during April. In the United States too new retail and consumer confidence data for May (as measured by the University of Michigan) will be announced. The season for corporate earnings in the US is largely over. Europe is slightly behind, with a few more companies to publish their earnings. The most prominent of these are Vivendi, Enel, Deutsche Telekom, Telefonica, SAB Miller and Deutsche Post. In the Netherlands the earnings of Aegon and Imtech should be interesting.