Improved outlook for the Chinese economy

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It was a relatively quiet week on the financial markets. The macroeconomic situation varied; notably, the indicators for the Chinese economy are gradually showing signs of improving.

Prices climbed slightly on the global securities markets and fell on most bond markets Ben Steinebach Ben Steinebach Head of Investment Strategy

In August and September, securities prices around the world fell sharply amid concerns that China’s economic growth would experience a severe downturn. While the indicators published last week cannot be termed robust, on the whole they were better than expected, and offer a hint that China’s economy has bottomed out for the present. One of these indicators was the sentiment among Chinese purchasing managers. The sentiment in the country’s industry has been less than 50 (signifying ‘neither contraction nor growth’) for some time now, yet in October it came very close to the 50 mark. In the services sector the index in fact climbed from 50.5 (in September) to 52.0. This is of particular significance to Germany's economy, as that country is a major exporter to China. The German economy has also been hit hard by a series of scandals, including those at Volkswagen and Deutsche Bank – recovery in China might act as a counterweight, as both industrial orders received and industrial output in Germany have now fallen three months in a row.

Outlook for the European economy still solid

Economic developments elsewhere in Europe are considerably better. This is evidenced by the sentiment among purchasing managers: in October this region in fact outperformed the United States, for example. Some of the indicators published in the US in recent months have been disappointing, and the Federal Reserve is accordingly very reluctant to raise the Fed Funds Rate, the Fed’s principal policy interest rate. Last week Fed chair Yellen, in a speech to one of the House of Representatives committees, reiterated her belief that a rate hike before the end of the year should not be ruled out. Presumably she wishes to keep her options open, and will put off any decision on raising interest rates for as long as possible depending on the condition of the US economy.

A quiet week on the financial markets

The markets were quiet last week. Prices climbed slightly on the global securities markets and fell on most bond markets, forcing interest rates up slightly. The corporate earnings published were moderately encouraging, with some exceptions. Prices on most of the securities markets climbed by 0.5-1% last week. Encouraging macro data boosted the amicable sentiment on the securities markets, and a flood of Q3 corporate earnings put investors in a positive frame of mind. In the international arena, some French banks – for example Credit Agricole and Societé Generale –published fairly positive earnings. German insurance giant Allianz disappointed somewhat, though the underlying developments were encouraging. In the Netherlands ING and NN presented their Q3 earnings. With a net profit of €1.1 billion, ING has been given a noticeable boost by the upturn in the Dutch economy: its net interest margin and capital ratios continue to improve and have reached solid levels. Although NN’s €392 million profit – better than had been predicted – was generated largely by non-recurring income components, the company’s strong cash flow supports its future dividend potential. We believe that this is a good thing for NN. Wolters Kluwer published moderately positive earnings, and by its own report its outlook for the remainder of the year is good. PostNL’s earnings were disappointing: at €40 million the company’s underlying profit was down by 20% relative to a year before, and €18 million less than forecast. However, PostNL has a track record disappointing Q3 earnings followed by surprisingly good results in the important – for parcels – fourth quarter. The AEX, having lost some ground a week before, closed on 466.6 on Thursday, up 1% from the previous week’s listing. On Friday morning the index had climbed slightly further.

Interesting macro data

Some interesting macroeconomic data will be published this week. We are entering the tail end of the earnings season, though some important companies are yet to come. In macroeconomic news the principal data of course concerns jobs and unemployment in the US, which was published on Friday afternoon. We expect 170,000 new jobs to have been added in October, though the actual figure will be available by the time you read this. China was set to publish its export and import movements in October at the weekend, which will show how far China has come with its transition from an export-controlled to a domestic economy. This week various countries will also publish data about industrial output and inflation, with output figures expected from the European Union as a whole and from France, Italy and the Netherlands. Details about inflation are expected from the United States, China, Germany, the United Kingdom and France. In the United States the University of Michigan is set to announce its consumer confidence data, and information about retail sales will also be published. Retail sales in the Netherlands will also be announced. Later in the week various European countries will present their initial estimated Q3 economic growth rates. Other anticipated events are the speeches by the ECB's Mario Draghi and the Bank of England’s Mark Carney. The tail end of the earnings season holds a number of important companies, including Cisko, Siemens and Vodafone, and in the Netherlands Ahold, Aegon, Delta Lloyd and Boskalis.


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