Last Thursday, the Federal Reserve (the Fed) increased its key interest rate, the fed funds rate, by 0.25 percentage point. This increase was in line with general expectations from the stock and bond markets, which reacted with restrained positivity.
In the macro arena, the four-day week leading up to Christmas will see the publication of lots of new data regarding consumer confidence
Ben Steinebach Head of Investment Strategy
While the European Central Bank (ECB) disappointed the markets earlier this month, the Fed did come up to expectations. The range in which the fed funds rate can move has been raised to 0.25% to 0.5%. The press conference following the decision did not yield any surprises either. Chair Janet Yellen emphasised the strength of the US economy and how it supports higher interest rates. According to expectations, there will be four more hikes in 2016, which will bring the range up to 1.25% to 1.5% – still extremely low. In the wake of a year filled with discussion and speculation, the markets responded with relief. USs equity markets gained more than 1%, and their European counterparts followed suit with a similar rise the next day. While the initial reaction was slightly more sizeable in Europe, this was counteracted by the continued decline of commodity prices, and the negative mood gradually settled back in on Thursday.
Industrial sector differs between US and Europe
Last week, many countries released new data on their industrial sectors. The US figures were somewhat underwhelming, both with regards to production (in November) and purchasing managers' sentiment within the sector (in December). In the eurozone, by contrast, the opposite applied to both. European businesses benefit from a weak euro, while the strong US dollar is causing US industrial companies headaches. Meanwhile, the Japanese and Chinese industrial production figures exceeded expectations in November. The 6.2% increase in China was a godsend for investors, who were anticipating a further slowdown to 5.6% compared to one year prior. Moreover, the rise encouraged hopes that the ongoing decline in commodity prices is finally starting to bottom out. For instance, the price of a barrel of Brent crude fell to about 37 dollars over the course of this week, from 40 dollars last week.
SBM-Offshore management in the dock
After several days of price increases, US equity markets lost considerable ground on Thursday, dragging their European counterparts down with them. Except for declining commodity prices, there was little news to give direction to markets. Energy companies have been going through a rough patch on the equity markets recently. Although they piggybacked on Wednesday’s positive sentiment to a degree, on Thursday energy companies took a pounding, as the initial gains could not balance out the negative impact of declining oil prices. For Royal Dutch/Shell, this year's total fall in price comes down to about 25%. French cable and telecom company Altice’s shares suffered a substantial loss this year as well, but managed to recover by over 13% on Wednesday after Deutsche Bank analysts concluded the fall was exaggerated. Meanwhile, Delta Lloyd once again attracted attention on the Amsterdam exchange. Like most other insurers, the company suffered sizeable losses due to doubts on whether its solvency meets the new Solvency 2 requirements. Delta Lloyd is very cheap right now, which makes it a likely takeover target. In our opinion, however, the share is somewhat speculative. In the midcap market, SBM-Offshore nosedived yesterday (-8.1%) after it was revealed that the Brazilian judiciary is bringing charges against the company’s management in connection with its ongoing bribery investigation. Regarding the attempt by a consortium of Gilde and Parcom to acquire Ten Cate, the plans are hanging by a thread now that only 60.5% of the shares have been offered for acquisition – significantly below the required two-thirds. The AEX, which fell to below 430 points last week, continued the downward trajectory and slipped below 420 points on Monday. From there on, recovery started, and the index closed on Thursday at 439 points: 2.3% up on last Friday.
Spanish parliamentary elections unusually tense
Over the next few weeks, the financial markets will continue seeing a lot of macroeconomic news. Parliamentary elections will take place in Spain on Sunday. Only a small amount of business news is expected to be released pre-Christmas. The Spanish parliamentary elections are extraordinarily tense for president Rajoy. Up to now, Spain has always had a two-party system. Either the socialist PSOE or the right-wing Partido Popular (PP) gained the majority of votes. But now these two parties have been joined by Podemos at the left end of the spectrum, and the originally Catalan party Ciudadanos on the right. Against this new political backdrop, it is highly uncertain whether Rajoy can continue with his reform policy.
In the macro arena, the four-day week leading up to Christmas will see the publication of lots of new data regarding consumer confidence. That goes for the European Union as a whole, but for Germany, the United Kingdom, and the United States (University of Michigan) as well. Furthermore, many countries will publish data on consumer spending, including the UK, France, the US, and Italy. The US will issue a third estimate of their gross domestic product, as will several European countries. New inflation data (both on consumer prices and producer prices) is to be released in Germany, Italy, and Belgium. The US will publish data on the housing market, more specifically sales of existing homes. And finally, in the Netherlands we will see new producer confidence figures.
That concludes this year's final edition of Investment News, as Christmas Day and New Year's Day will both be on Fridays. Reviews of 2015 and outlooks for 2016 will be published on 30 December. I would like to wish all our loyal readers a merry Christmas.