ECB President Draghi’s balancing act

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Mario Draghi

The mood on the financial markets this week was dominated by the policy of the European Central Bank (ECB). Yields on the German bond market fell further and equity markets stood still.

The financial markets were also influenced by developments in China and Greece this past week Ben Steinebach Ben Steinebach Head of Investment Strategy

ECB President Mario Draghi had a tough job to do during the first policy meeting held since the ECB has started its bond buying programme. On the one hand, he could point to the programme’s success during the first month, when the EUR 60 billion-per-month target was basically met. On the other, he had to avoid sounding too upbeat as the markets might anticipate premature termination of the programme, expecting it to end earlier than in September 2016.

He succeeded in this balancing act and managed to convince the markets that the bond buying programme will run its course, provided inflation in the eurozone increases to around 2%. We expect inflation to rise, but to reach 2% only in the course of 2016.

Mario Draghi does not believe that the imminent shortage of suitable bonds is a real problem. Some analysts conclude from the steep decline in German yields (to 0.07% for 10-year government bonds this past Thursday) that the extent of the shortage means there is insufficient paper to complete the entire programme. President Draghi, however, says the programme is flexible enough.

The financial markets were also influenced by developments in China and Greece this past week. China’s economic growth contracted further to 7% in the first quarter, which was the exact target of the Chinese authorities. The financial markets are afraid that growth will slow down further, but we do not believe that risk is very high as the Chinese authorities have enough room for manoeuvre to boost construction and the housing market – the economy’s two weak spots – to prevent a hard landing.

Greece is still considering reform measures that meet with the Eurogroup’s approval. The group will convene this coming Friday, 24 April, under the leadership of Jeroen Dijsselbloem and will have to take some decisions. The proposals presumably relate to job market and pension reforms, but will undoubtedly be made available only at the last minute. This is important to the liquidity position of Greece, which will have to start repaying the IMF again in early May .

European markets take a break

Global equity markets were quiet last week. Prices in Europe inched down and markets in the United States slightly outperformed those in Europe, rising slightly. The reporting season is starting to pick up. Besides the ECB’s press conference, there was not much macroeconomic news that moved the equity markets this past week. Weak results for America’s retail sales in March did not spoil the mood on the US markets, presumably because all eyes have already turned to the second quarter, when the economy is expected to improve.

There was mixed corporate news in the United States. American banks traditionally publish their results at the start of the reporting season. With the exception of Bank of America – which posted disappointing results – the major banks (Goldman Sachs, JP Morgan, Wells Fargo and American Express) reported better-than-expected results. The figures for Goldman Sachs were even the best this bank has reported in five years’ time. And Schlumber, an oilfield services company, presented better-than-expected results, despite declining demand, lower prices and the strong dollar. General Electric announced that it will sell off the majority of its financial activities for a total of USD 26.5 billion. The company will concentrate more on its core business as an industrial conglomerate. GE will use the proceeds of the sale to fuel a share buyback programme.

Nokia grabbed the spotlight in Europe last week, announcing its plans to acquire Alcatel Lucent (for EUR 16.5 billion) in an effort to improve its competitive position in relation to Ericsson and Huawei.

The Netherlands, meanwhile, eagerly eyed Unilever’s and ASML’s results. Unilver presented slightly better-than-expected sales figures for the first quarter. Sales in Europe edged down, as did those in Russia and Brazil, but other emerging markets drove up growth. Unilever is benefiting from the lower price of the euro against many other currencies. The consumer goods firm consequently expects growth at the high end of the expected range of 2-4% for the rest of the year. ASML’s first-quarter results were largely in line with expectations, both for sales of chip machines and for margins. Order intake, however, was 26% lower than it was in the final quarter of 2014.

The AEX was more than 0.5% lower on Thursday – finishing at 504.38 points – than it was on the previous Friday, and lost another 0.6% today. Still, the index did better than the German DAX, which lost over 3% last week.

Plenty of results expected

More macroeconomic news is set to arrive this coming week, which could affect prices on the financial markets. There are also plenty of results expected this week. On the macroeconomic front, this week will see the first indications of sentiment among industrial purchasing managers in many countries. The big question is whether the recent good figures for Europe’s economy will be reflected in the levels of this confidence indicator. Two interesting confidence indicators will also be published in Germany this week: the ZEW index (which reflects how investors view the German and European economies) and the Ifo index (the main measure of business confidence in Germany). We are also looking forward to the levels of consumer confidence in the European Union and the Netherlands, and to retail sales in Italy and the Netherlands.

The United States will publish housing market data next week (sales of new and existing homes), which will be particularly interesting following last week’s disappointing figures on the number of housing starts. The US will also publish orders for sustainable goods in March, an indicator of the state of economic activity.

Several companies are expected to publish their results in the week ahead, the main ones being Morgan Stanley, IBM, Halliburton, Manpower, Coca Cola, McDonald’s, Boeing, Microsoft, Google, Starbucks, General Motors, AstraZeneca and Novartis. In the Netherlands we expect results from Heineken, ASMI, Akzo Nobel, TomTom and Ten Cate.


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