The euphoria on Europe’s markets surrounding the stimulus package announced by the European Central Bank (ECB) quickly made way for concerns about the situation in Greece. Although they came under some pressure as a result, stock markets in the United States were hit much harder, as the strong dollar is evidently making its effects felt.
Another remarkable development was that the US stock markets were again outperformed by the European exchanges last week, despite the situation in Greece.
Ben Steinebach Head of Investment Strategy
The sense of euphoria from the ECB’s announcement that (together with the national central banks) it has earmarked an enormous sum of EUR 1,140 billion for stimulating the eurozone’s economy over an eighteen-month period and restoring inflation to the targeted level of slightly below 2%, dominated the international financial markets until they closed on Monday. Europe’s stock markets in particular, which had already climbed considerably in anticipation of the decision on 22 January, continued this upward trend. After Monday, however, the political situation in Greece once again began to dominate the sentiment. Investors are evidently worried by the resounding victory recorded by Syriza, on the back of its campaign decrying further reforms and austerity measures and calling for the government debt (or at least part of it) to be cancelled. The concerns among European leaders grew when less than 24 hours later Syriza managed to form a government with the small Independent Greeks party, which shares Syriza’s views on both these points (though the coalition partners appear to be miles apart on other issues). The unwillingness of the Greeks, led by their new Prime Minister Tsipras (of Syriza), to moderate their demands immediately is understandable from a bargaining position, yet the tone is extraordinarily harsh. The financial markets will need to be patient and see what this week’s negotiations will bring. Although the longer maturities and lower interest rates agreed upon in 2012 leave very little scope for accommodation, Europe (i.e. the ECB and the Commission) and the IMF may be expected to find room for allowances in response to the new political situation.
Of course this was not the only news affecting the financial markets last week. Following a meeting of the Federal Reserve’s policymaking committee, the implication is that the Fed will implements its first rate hike for the Fed funds rate midway through the year. Another remarkable development was that the US stock markets were again outperformed by the European exchanges last week, despite the situation in Greece. This continued the trend that was visible throughout January: presumably many American companies are beginning to feel the strain as the stronger dollar renders them less competitive.
Royal Dutch Shell affected by oil prices
Various companies published their earnings for the final quarter of 2014 last week. A remarkable number of American companies expressed their frustration with the strong dollar, while European companies benefitted. Understandably Royal Dutch Shell was an exception. American companies that are said to have been hit by the new exchange rates include Pfizer, whose results were also affected by the expiry of some of its patents, and Amazon, which saw its sales fall yet recorded considerably better earnings per share and margins than expected. VISA also announced impressive results; an important reason, according to the company, was that US consumers are finding other ways to spend half the savings that they are enjoying from the lower energy prices, and using their credit cards for some of these payments. However, the strong dollar also caused Google’s earnings to fall short of previous estimates, despite a sharp increase in the number of videos viewed on its subsidiary YouTube. Microsoft similarly disappointed, in particular because falling PC sales mean that the demand for Windows and Office is not living up to expectations. The company also presented a somewhat disappointing outlook. Apple was a notable exception to these poor figures: it reported sales of nearly 75 million iPhones during the final quarter of 2014, chiefly in China and on other emerging markets (such as Brazil).
On the whole, European companies published earnings that were reflected the forecasts more closely, for example Siemens and Novartis, with the weak euro working to their advantage. One logical exception was Royal Dutch Shell, which is being hit hard by the sharp decline in oil prices. The enterprise announced its decision to postpone or cancel USD 15 billion in capital expenditure. The negative impact of this policy change will also carry over to the suppliers of the company’s research and exploration operations. At USD 3.3 billion, the company’s profit fell approximately 20% short of earlier estimates. The AEX, which had reached 454.56 points on 23 January and continued its rise to nearly the 460 mark the following Monday, began to fall as the week progressed, hitting 451 points on Friday morning.
Germany: ‘low yield’ replaced by ‘no yield’
While the yield on German and Dutch government bonds is at an all-time low, interest rates in the south of Europe cautiously rose. Corporate bonds offer an alternative. Following the ECB’s announcement of its stimulus package, the yield on 10-year German government bonds has fallen to 0.3%; midway through last year, when oil prices began to fall, it was still 1.25%. Perhaps not surprisingly, with German consumer prices continuing to fall in January (deflation), 5-year bonds are now ‘no yield’. At the same time, interest rates in the Europe’s southern countries, boosted by the political situation in Greece, cautiously began to rise. The 10-year yield in Greece climbed 1.5% points to almost 10%, while elsewhere in southern Europe (including France) yields rose by around 8 basis points. Corporate bonds also performed well. With the ECB’s existing bond-buying programme (ABS and covered bonds) forcing other buyers out of the market, corporate bonds are becoming a suitable alternative. The difference with the yields on government bonds is diminishing further as a result.
European corporate earnings
Little exciting macroeconomic news is expected this week, the possible exception being the publication of US employment data on Friday. However, a wide sample of European companies will be announcing their earnings. These are mostly companies in the banking sector (BNP-Paribas, Banco Santander and BBVA) or the pharmaceutical industry (Merck, Glaxo SmithKline, AstraZeneca and Sanofi). ExxonMobil and Walt Disney in the US and European manufacturer of luxury goods LVMH will also announce their results. We also expect the results of Dutch companies KPN, Wereldhave and Nutreco (for which SHV’s new offer, raised from EUR 44.50 per share to EUR 45.25, will likely seal the deal). In macroeconomic news, Germany’s industrial orders for December will be among the more interesting figures. We are also curious about consumer spending in the United States and retail sales in the European Union for the same month. However, the most important figure will be the latest numbers for US employment (non-farm payrolls) and unemployment in January.