Greek charm offensive stalls in Germany

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Angela Merkel and Alexis Tsipras

Last week’s developments on the international financial markets were dominated by the Greek situation and by the recovering oil prices. Oil climbed above USD 55 per barrel, alleviating some of the concerns about ongoing deflation. Greece’s new government turned a tour of Europe into a charm offensive.

The country’s new prime minister Alexis Tsipras and Yanis Varoufakis, the new minister of finance, each visited a number of European capitals. Ben Steinebach Ben Steinebach Head of Investment Strategy

Since 13 January, when oil (Brent) hit a low – for the present – of USD 45.74 per barrel, prices have been recovering and in fact reached USD 58 last Friday. Traders are apparently regaining confidence, while another factor contributing to the recovery is that positions on the futures market have presumably pivoted. This development was further boosted by positive macroeconomic indicators, including the latest European retail data, German factory orders and the European Commission’s optimistic estimates for the economic outlook in the separate countries of Europe. Economic growth in Spain also gave cause for new optimism.

The situation in Greece continues to bring tension to the financial markets. The country’s new prime minister Alexis Tsipras and Yanis Varoufakis, the new minister of finance (and like Tsipras a member of Syriza), each visited a number of European capitals. Having been received with a degree of sympathy in Paris, Varoufakis came in for a hard time from Wolfgang Schäuble, his opposite number in Berlin. After their meeting, Schäuble announced that they had agreed to disagree, though Varoufakis told the press that they could not even agree there. Schäuble told Varoufakis that Syriza had made too many unrealistic promises to the Greek voters. He also argued that Varoufakis needed to continue the talks with the Troika (IMF, ECB and European Commission) rather than using bilateral negotiations in an attempt to divide the European partners. The ECB then turned on the thumbscrews, announcing a temporary stop to its acceptance of Greek government bonds as collateral. Greece – both its banks and its government – is now in dire need of cash, and will need to call on the Emergency Loan Agreement with Greece’s national bank. Despite the poker bluffing on both sides, however, we expect a compromise to be reached shortly. We also believe that the country will remain part of the eurozone, which is what 75% of the Greeks want and is the direction in which Tsipras is heading. The financial markets largely disregarded the Greek complications last week: all the leading stock exchanges – except in Japan – ended the week with solid gains, of 3-4% in the United States and of around 1.5% in Europe.

Lucas Bols back on the Amsterdam exchange

Amsterdam’s exchange welcomed two prominent new stocks: Lucas Bols and GrandVision. The sentiment on international stock markets was again largely determined by the earnings of some important companies. On Wednesday, Lucas Bols returned to the Amsterdam exchange, launched at EUR 15.75. The launch met with favourable response, and by Thursday the stock had climbed 5.7%, closing at EUR 16.65. On Friday GrandVision (which owns Eyewish and Pearle, among other brands) was floated on the Amsterdam exchange, with a launch price of EUR 20. HAL, its parent company, hopes to raise EUR 1 billion (for 20% of the shares) with the issuance. In other news, the stock markets responded to the ongoing earnings season. In the international arena the reports were mixed: for example, Swiss automation and power company ABB announced disappointing earnings, with profit at 6% below consensus, while Mastercard – just as VISA the week before – published excellent results, with its profit up by 21% relative to a year ago. Pfizer also made the news with its acquisition of Hospira, which occupies a strong position on the market for injectables. The takeover cost USD 17 billion, a relatively minor sum for Pfizer. We believe that this strategic acquisition heralds an attempt by Pfizer to acquire a position on the market for cheaper medicines. More acquisitions are likely to follow, including potentially Activis, which recently bought Allergan. In the Netherlands, KPN presented solid Q4 results, though these were offset by its disappointing cash flows and outlook for 2015. On Thursday the AEX closed 1.1% higher than on the Friday before, at 455.3, though on Friday morning it was down to around 453 points. Nevertheless, the index has already gained 7% this year, compared with 5.6% over the whole of 2014.

Continuing pressure on capital market rates

Yields have continued to fall since the ECB announced its bond-buying programme. In some countries the shortage of bonds to be bought up on a large scale might result in scarcity. Although the rally in the bonds markets has slowed slightly, interest rates are expected to continue to fall. Although this will hit the strong countries of the eurozone hardest, the shortage of high-quality bonds means that this will spill over onto other markets, for example the markets for non-eurozone government bonds and for corporate bonds. Risk premiums on bonds are also falling, and new and previously issued German government bonds are now recording negative yields on terms of up to 6 years – in fact these bonds are yielding less than their Japanese counterparts. The demand for high-quality bonds is also putting pressure on yields in the United States. Moreover, the rally is shifting to the corporate bond market, where companies such as Nestlé and Royal Dutch Shell have recorded negative yields. It seems that the ECB’s bond-buying programme of EUR 60 billion per month will exceed the supply available in some countries. In Germany (where the government has a surplus) in particular, the risk exists that bonds will be scarce, and that yields will come under further pressure as a result. In consequence, we have adjusted our estimates for German rates down to 0.4% by the end of this year (previously 1%) and to 1% by the end of the next (previously 1.5%).

Earnings season still in full swing

This week corporate earnings will continue to be important in determining the direction of the financial markets. However, some interesting macro data are also expected, beginning with Friday’s publication of employment in the US in January. Among the international companies, we look forward with particular anticipation to Coca Cola, Total, UBS and Cisco. In the Netherlands, the focus will be on ING, Nationale Nederlanden, DSM, Heineken, AKZO Nobel and TomTom. After the announcement of employment in the US last Friday, data will be announced this week about industrial output in France, Italy and the European Union as a whole during December. The latest US retail figures for January should also be interesting, as will be the initial estimate of US consumer confidence (as measured by the University of Michigan) in February.


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