Sharp falls in share prices and rising bond yields are generally signs of jittery markets and risk-averse investors. Scandals like the one that recently hit Volkswagen are contributing to the negative sentiment.
The Chinese economy has been cooling for some time, but its growth level remains high in international terms
Ben Steinebach Head of Investment Strategy
Surprisingly, though, equity markets in particular still haven’t managed to take advantage of a relatively favourable macroeconomic environment. Fears of a worsening economy are limited mainly to China and to other emerging market countries such as Brazil and Russia. It’s unlikely, however, that these will have much of a negative impact on Western countries, which certainly hasn’t been the case so far. In this context, it’s worth noting that the Chinese stock market lost very little last week (–0.1%), while US stock markets fell by between 1% and 2%, and European stock markets by as much as 4% to 6%. Uncertainties about the policies of central banks are presumably adding to market jitters, too. In a speech given in Massachusetts, Janet Yellen, Chair of the Federal Reserve, did not rule out the possibility of an interest rate rise this year, but there’s still far too much uncertainty about the policy at the moment. The same goes for that pursued by the European Central Bank (ECB). President Mario Draghi says the bank is ready to do all it takes, but he’s sending relatively few signals about whether, when and to what extent the ECB’s policy will be intensified. Accordingly, the persisting market uncertainty continues to test investors’ nerves and feed their aversion to risk. This, in turn, is leading to yet further falls in share prices and investors fleeing to bullish bond markets where interest rates are falling. Last week, the fall in interest rates was obviously somewhat more pronounced in Europe than in the US.
Macro data in the West remain favourable
For several months, a divergence has gradually been developing between many emerging economies and developed Western countries. The Chinese economy has been cooling for some time, but its growth level remains high in international terms. The situation is worse in Russia and Brazil, as both countries are threatened by low commodity prices. The data on Western economies published this week were generally positive – or at least not as bad as expected. This was true, for example, of business confidence in Germany (Ifo) and the Netherlands, which was up in both countries, despite an expected slump in Germany. There were also positive signs in the US, particularly with regard to the housing and labour markets. Although durable goods orders slowed, the decline followed two months of significant increases; plus, if we exclude motor vehicles’ orders, which are always very volatile, we can even point to a stabilisation. In this light, it still seems likely that the US and Europe will manage to maintain a favourable economic course.
Volkswagen scandal dents car sector as a whole
The fraud allegedly committed by Volkswagen, which fitted diesel cars with sophisticated software to manipulate CO2 emissions tests, could have far-reaching consequences. Volkswagen has lost about one-third of its value, resulting in attractive valuations by analysts’ models. Nevertheless, we’re maintaining a cautious outlook on Volkswagen shares. We are very disappointed in the management of the company and are awaiting the results of the investigation, and possibly even criminal proceedings, in the US. Last week, the Volkswagen scandal had a significant knock-on effect on other share prices in the sector, as investors fear that other companies could, to some degree or other, also be practising similar types of fraud.
German power companies also in trouble
Volkswagen isn’t German industry’s only problem. Shares in two of the country’s biggest power producers, E.ON and RWE, have been under considerable pressure for some time. After liberalisation of the sector, and particularly during the crisis since 2007, the sector’s financial situation has been deteriorating. Many companies now face shrinking provisions. After the 2011 nuclear disaster in Japan, the German government decided to decommission all its nuclear reactors by 2022. It now appears that such a move will cost much more than initially expected, with the two giants E.ON and RWE hardly able to shoulder the burden. These developments are also contributing to the negative sentiment in equity markets. Shedding nearly 5% compared to last Friday, the German DAX was among the hardest hit. The Amsterdam Exchange Index (AEX) fell just 4.1% at 409.86 on Thursday – over 3% lower than at the end of 2014. On Friday, though, the AEX bounced back to just over 421 points.
A range of macro data on the agenda
Here’s hoping we won’t be getting the same kind of corporate news next week as we did last week. No further corporate news is expected, but we are looking forward to some interesting macroeconomic data. Largely overshadowed by other news, last Sunday’s Greek elections have had little impact on the global financial markets. Details on how the new government plans to reform the Greek economy within the frameworks identified by European partners may be released next week, or in subsequent weeks.
Next week will see the publication of a wide range of macroeconomic figures. Data are expected out of the US on income and household spending in August, consumer confidence (as reported by the Conference Board) in September, house prices in July and – at the end of the week – employment and unemployment figures for September. The UK, France and Germany will also be releasing their figures on consumer spending in August, while data on both consumer and producer confidence in the EU as a whole and in Italy are expected. Also interesting will be the publication on Wednesday of eurozone inflation data ahead of Thursday’s ECB monetary meeting. Inflation data out of Germany, Italy and Belgium are anticipated as well. Lastly, final data on purchasing managers’ sentiment in September will be released next week. Provisional data, which were recently published, are generally a good indicator of the final outcome.