ECB bond buying begins

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European Central Bank Frankfurt

As the Eurosystem (ECB plus eurozone national central banks) made its first bond purchases under the new programme last week, bond markets surged, but equity markets lost momentum.

The effect on the bond markets themselves was relatively strong Ben Steinebach Ben Steinebach Head of Investment Strategy

Although price gains on eurozone equity markets levelled off last week compared to previous weeks, sentiment was still upbeat - indeed, better than in the United States, where equity markets continue to trend slightly lower. It looks, therefore, as if investors (in equity at least) were more impressed by the announcement of the ECB’s new policy than by the actual launch of the programme last week.

By contrast, the effect on the bond markets themselves was relatively strong. Benchmark ten-year Bund yields fell from 0.36% last Friday to a 0.2% low on Wednesday, edging back up on Thursday. In the first four days of the week, the Eurosystem bought bonds worth EUR 9.8 billion (21% of which were Bunds), which means purchases are on track to reach the monthly target of EUR 60 billion (more on this in the bond market paragraph below).

In the United States, equity markets dropped marginally, while ten-year Treasury yields remained broadly stable. This is undoubtedly due to rather disappointing news on the US economy. Retail sales fell in February for the third month in a row, despite favourable labour market trends and modestly rising incomes. There are a number of incidental factors that could explain this decline, such as severe winter weather and strikes in West Coast ports. The current strength of the US dollar may also be a factor. Apart from the retail sales figure, little other data was released that could provide direction to financial markets.

Boskalis and Fugro taking their dispute to court

With all eyes focused on the ECB, meagre corporate news flow offered little direction to equity markets. A few Dutch companies did make the headlines last week. And of course last Monday Apple was one of the last to present its new Apple Watch. On equity markets, it turned out to be a non-item.

More interesting – for the Dutch market in any case – was the presentation of the annual results of TKH (Twentse Kabel Holding). Earnings were extremely solid, up 54% on 2013 at EUR 86 million and beating the forecast of EUR 82 million. And better still, the company’s order book has never been so big.

Boskalis was another company presenting excellent results over the past year. EBITDA climbed 25% compared to 2013, reaching EUR 946 million and overshooting the consensus earnings forecast of EUR 864 million. A highlight was the announcement that dividend was being raised by 29% to EUR 1.60 per share, implying a dividend yield of 3.7%. At the same time, however, management announced the end of the company’s share buyback programme, reasons being changed market circumstances and plans to acquire a bigger stake in Fugro. In its turn, Fugro openly criticised Boskalis’ demand that Fugro at least partially dismantle its anti-takeover defences. The ensuing heated dispute is to be decided in court this Tuesday. While European equity markets enjoyed positive sentiment, a price fall on Tuesday caused a bit of a scare. On balance, the AEX edged up by 0.4% last week, which was in line with most other European exchanges. Only the German DAX fared significantly better, climbing 2.15%.

Hunt for return in bond markets

The kick-off of the Eurosystem’s bond purchasing programme was the dominant theme among market watchers in the past week. To predict the programme’s effect, they often look at experiences in the United States, but there are significant differences. Bond purchases in the first four days (total value EUR 9.8 billion, average duration nine years) suggest that the Eurosystem is on track to meet its target of buying EUR 60 billion’s worth of bonds a month. The purchases had the desired effect of bringing down bond yields. In the United States, where three such programmes have been implemented since 2008, yields also declined at first, but rose again during the course of the programme to end broadly unchanged.

The question whether this will happen in the eurozone, too, is a hard one to answer. After all, the situations in the US then and in Europe now differ significantly on a number of points. The United States – certainly at first – was struggling with a large budget deficit, which meant that a lot of new bonds were being issued. Germany, on the contrary, has a modest budget surplus, which means there is a great shortage of suitable bonds for the ECB to buy. A second difference is the currency involved. The US dollar is used far more commonly than the euro for the financing of other assets, notably commodities. As a consequence, dollars disappear more easily from the monetary system, while euros stay inside the system. Both these differences are likely to lead to a more lasting downward pressure on yields. We therefore expect yields to remain under pressure for some time to come.

The ECB has indicated that it is prepared to buy bonds with negative yields, stating the level of the deposit rate (-0.2%) as the minimum. Nevertheless, there is a shortage and it remains to be seen whether the Eurosystem will continue to be so successful. Many institutional investors have a statutory obligation to hold such paper in their portfolio, and are therefore not in a position to sell. Investors with more freedom are already moving into other – riskier – areas of the bond market (credits, including high yield). This has resulted in rising bond prices and declining yields for such paper, with spreads to government bonds tightening. As the hunt for return is still on, we expect bond yields to decline further in the short term.

With little newsflow to give direction to markets, all eyes remain on ECB

With only a few companies still to announce their results, the earnings season is effectively over. Nor is there much macro-economic news in the pipeline. Which means the ECB is likely to remain the dominant theme in financial markets. In terms of corporate news flow, the highlight of the upcoming week will be the outcome of Fugro versus Bokalis, which goes to court on Tuesday. Furthermore, two stragglers – Imtech and Nike – will be releasing their results over 2014 Q4. For the Dutch market, of course, Imtech is particularly interesting.

Neither is there much to be expected in the way of macro-economic news. From the United States we are awaiting industrial production data for February and the Philadelphia Fed-index, an early indicator of US economic performance in March. Both these figures are key ones for our opinion on the US economy. Meanwhile, next week will see the publication of the ZEW-index for Germany and the eurozone, which provides insight into how investors view the German and eurozone economy in March. In the Netherlands, January retail sales figures will be released. So all in all, it will still be the ECB that we need to look to for direction.


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