Equity markets stabilising, but tensions remain

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Over the past week, the stock markets appeared on balance to be stabilising. Although the decline seems to have bottomed out for now, tensions remain. Share prices fluctuate considerably throughout the day, although the closing price does not always reflect this.

Last week's macroeconomic data indicates that both the US and European economies are generally resilient enough to handle the current developments in China Ben Steinebach Ben Steinebach Head of Investment Strategy

Yesterday, for example, the AEX closed about 2 points lower. However, this closing price reveals nothing about the solid 7-point gain that was on the share price board earlier that day and subsequently lost. This is a common scenario on other stock markets as well. Looking at the AEX from a technical point of view, no clear conclusions can be drawn at this moment. What matters is that the support around 400 holds up. It marks the lowest point of late August as well as the bottom of the long-term upward trend.

Macro data generally healthy

Last week's macroeconomic data indicates that both the US and European economies are generally resilient enough to handle the current developments in China. US economic growth forecasts were adjusted upwards again in Q2, from 3.7% to 3.9%. In the US we also saw increases in consumer confidence, house prices and consumer spending. Although there was some disappointing data as well, US figures suggest a solid backdrop overall. That said, this week's most important US data will be released on Friday afternoon, past the deadline for this publication. These are the monthly employment figures. To the Fed, they are crucial in deciding whether to raise interest rates during the next meeting. We maintain our expectation that the first US interest rate hike will take place this December. This week, Europe showed a surprising jump in economic sentiment as measured by the European Commission, which ended at a four-year record high. Last week's key European inflation figure was minus 0.1%. While not a reason for concern, this figure provides the European Central Bank (ECB) with plenty of leeway to extend its stimulating policy. We believe that the bank's president, Draghi, and his fellow board members will indeed do so.

Nike results good, but shares too expensive

Although not much business news was released last week, Nike posted its data. The sports shoe manufacturer reported strong quarterly results last Friday. Investors reacted very enthusiastically; the stock rose by about 9% to USD 125, a new all-time high. Underlying sales growth was 15% year-on-year, boosted by strong demand from China (+30%). Earnings growth was higher than expected, as the sports giant sold more products at higher prices. A low effective tax rate also contributed. The orders for next quarter (+17%) also exceeded expectations. Based on the solid results, we have increased Nike’s fair value from USD 85 to USD 90 per share. Still, the current price far exceeds the fair value. Over the past few years, Nike has been a fantastic investment. However, we see the valuation of 30x 2016 earnings as excessive, and have consequently lowered our opinion on the stock to sell.

Outlook earnings season

In the past few days, Nike was one of the few companies who posted their quarterly figures. The reason is that Nike's financial year does not coincide with the calendar year. For companies with a regular financial year, the earnings season will kick off next week, when Alcoa publishes its data (on 8 October, after trading hours). What will we focus on? Firstly, investors will be curious to know what companies are going to say about developments in China. Furthermore, an important question is to which degree companies can benefit from the economic recovery in Europe. Especially in the US, in the past quarter, many companies complained about negative currency translation effects, indicating that they were feeling the pinch of the strong US dollar. Vis-à-vis the euro, however, the US dollar has settled down somewhat in the past few months. As such, the currency effect may well have decreased. Prior to releasing its results, earlier this week Alcoa announced that they want to split the company. One part will focus on upstream activities, while the other half aims for activities with higher added value. Although we consider this to be a logical reaction to the difficult situation that many commodity companies face, we should not expect miracles. We will know more on 8 October.

Agenda: central banks in the limelight

Next week's macroeconomic agenda will be dominated by the central banks. Next Monday, in the US several purchasing managers' indices (PMIs) will be published. Tuesday, at 17:00, ECB president Draghi will make a speech. On Wednesday, data on industrial production in Europe and more will be released. Come Thursday, the Bank of England will reveal its decision on interest rates. Thursday also marks the day that the minutes of the most recent Fed meeting will be published in the US.

Ben Steinebach's column was written by Leo de Jong this week.


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