The financial markets were again very volatile last week. Although the uncertainty surrounding the economic outlook in the United States was the main factor, renewed upsurges in oil prices, the euro and capital market interest rates also played a part.
Evidently significantly greater uncertainty now surrounds the outlook for a range of indicators
Ben Steinebach Head of Investment Strategy
Last week oil prices (Brent) rose from $64 per barrel to $67, most countries’ 10-year yields climbed 10 basis points (0.1% points) and the euro rose from $1.12 to $1.14 against the US dollar. This combination typically hurts European stocks more than US stocks, and most European markets recorded losses varying between 0.5% and over 1%, while on balance the US markets – with the NASDAQ leading the way – realised minor gains. It should be noted, though, that this is not a trend: the rising oil prices, interest rates and euro described here have fluctuated wildly over the past two or three weeks. Evidently significantly greater uncertainty now surrounds the outlook for a range of indicators, beginning with the outlook for the US economy, which persists in falling short of the growth rates predicted by most economists late last year. A new onslaught of harsh weather in the Northeast and strikes in ports along the West Coast are valid explanations of the poor economic growth – or even perhaps contraction – during Q1. Yet by now signs of improvement should be emerging, and the stagnation of retail sales in April that was announced last week came as a severe disappointment. The explanation is now shifting to the consumers, who seem reluctant to cash in on their improved purchasing power from the drop in oil prices during the latter half of last year. Although this is another presumably valid explanation, the markets are struggling more and more, which is adding to the turbulence. At the same time, some question marks remain about the bond-buying programme of the European Central Bank (ECB). With Germany’s Bundesbank injecting the largest share of capital into the ECB, much of the programme is aimed at German government bonds. As Germany’s government has surplus (however small), demand is high while supply remains low. The expectation was that prices would rise steadily while yields fell, and in fact this was the case until late-April. With yields now rising, however, the explanation is that the bond purchases are not spread evenly over time. Until late-April, exceptionally large numbers of German bonds were bought; since then matters have calmed down and demand is shifting to other parts of the market. We predict that German yields will fall again after the summer, when demand will increase once more.
Encouraging corporate earnings unable to charm the stock markets
For much of the week, the sentiment on the leading international stock market was low. When the dollar fell on Thursday, the US markets – unlike their European counterparts – managed to finish the week higher than it had begun. In Europe the first Q1 economic growth data were announced last week. Though not strong, they were not poor either, with a growth rate of 0.4% relative to Q4 of last year, when growth was 0.3%. France and Italy outperformed the forecasts, with growth rates of 0.6% and 0.3% respectively. Conversely, Germany (0.3%) and the Netherlands (0.4%) underperformed, although in the previous quarter the economies of both these countries experienced relatively strong growth. Greece experienced a contraction (-0.2%) for the second consecutive quarter, putting further pressure on its government finances and as a consequence on the negotiations. Nevertheless, the markets did not suffer directly from the protracted negotiations, in part because many of those involved announced that the mood had improved and was constructive. On the whole last week’s corporate earnings were encouraging. At the tail end of the announcements from the US, Cisco reported higher earnings per share than predicted. In Europe, Telefonica presented a strong profit, owing partly to its acquisition of E-plus from KPN. KBC’s earnings were also strong and better than expected, combining an improved financial position with solid growth. Reports in the Netherlands were mixed, with Boskalis’s earnings outperforming expectations and Wolters Kluwer’s earnings matching the forecasts. However, Heijmans, Aegon and (once again) Imtech underperformed. For Heijmans, the risks of overspending appear to outweigh the potential effect of recovery on the housing market. Aegon’s earnings fell 14% short of the forecasts, and real improvement appears unlikely. Imtech’s earnings were again poor, and management’s decision to step down will not, we feel, lead to any improvement in the company’s strategy in the short term. Important good news was the announcement that Ahold is considering acquiring its Belgian counterpart Delhaize. The two companies appear to complement each other (including in the United States) better than many had assumed, and we believe that ample opportunities for synergy and the resulting gains can be realised. The AEX remained at almost the same level as the week before, closing on 490.7 (outperforming most other European markets) and by Friday morning had almost reached 495.
Earnings season almost over
A few companies in the United States have yet to publish their earnings, while in Europe too the season is coming to a close. However, some interesting macro news should emerge this week. In the United States, Wal-Mart, Merck, Home Depot and Hewlett-Packard are expected to announce their earnings. In Europe Vodafone and Marks&Spencer, and in the Netherlands Delta Lloyd, need to show how they performed during Q1. In macroeconomic news data about producer confidence should be interesting this week. On Thursday a range of countries will announce the initial and provisional data about the sentiment among purchasing managers in May. We are interested to see whether the data from the US point toward recovery and whether the European figures underline the encouraging economic developments. Near the end of the week Germany will publish the Ifo Indicator, the principal measure of business confidence. This will be preceded by the ZEW Indicator, which shows how investors feel about the German (and European) economy. The United Kingdom, the United States and the European Union will be releasing data (many of which are the final figures) about the movements in consumer prices in April. Japan will publish data about its industrial output and machine orders, and it will become clear whether the March data are better than the figures for February. This will also give some indication of the overall economic growth rate during Q1, which will be announced later in the week. Lastly, the US is set to publish data about the housing market in April: both the number housing starts and sales of existing homes.