After several very turbulent weeks, the global financial markets entered calmer waters last week. The markets are still jittery, though, as they look towards the outcome of the Federal Reserve’s policy meeting later next week.
Although no corporate news is expected in the coming week, there will be plenty of macro news
Ben Steinebach Head of Investment Strategy
Market sentiment was buoyed by encouraging data from the eurozone and the US. The eurozone economy grew slightly more than expected during the first half of the year, and the outlook for the second half is even better. The US labour market improved, as did SME confidence. In addition, Germany saw an increase in industrial production which was better than expected, with exports also growing despite concerns about slowing growth (and imports) in China. The markets’ newly regained composure resulted in an improved climate for the corporate bond market. Last week also saw companies like Apple and Shell tap the bond market to raise €12.3 billion.
Markets await Fed news
Set for next Wednesday and Thursday is the Federal Open Market Committee (FOMC), where the Fed will determine its interest rate policy. The financial markets have long expected that it will then raise the federal funds rate for the first time in nine years. But after all the worries about China in recent weeks, it’s no longer a foregone conclusion, and market players are now seriously considering the possibility that the Fed may hold off until its December meeting, and possibly later still. A rise next week could well exacerbate market turmoil and would almost certainly translate into falling equity markets.
The ECB may change its course, too
It’s not just the Federal Reserve which may now be thinking differently about the future and the markets – the same goes for the European Central Bank (ECB). Just last week, President Draghi hinted that the ECB might extend its bond-buying programme, currently totalling €60 billion a month. Extending the cut-off date to September 2016 is a possibility, but the ECB may be more likely to increase the total by €20 billion a month. All this is driven by fears that a sharper-than-expected slowdown in economic growth in emerging countries (China in particular) could again lead to falling commodity prices and, consequently, an increased threat of deflation. Other major emerging countries are in trouble, too, such as Russia. Brazil, however, is in recession, has a skyrocketing government deficit and is dogged by political problems. Following a series of scandals, the country’s president Dilma Rousseff is facing calls for impeachment. The Brazilian real has fallen sharply in value, and S&P recently downgraded Brazil’s credit rating to junk (BB+), which essentially means the country is no longer creditworthy.
Equity markets recovering
Although the results season is now behind us, there’s been plenty of corporate news of late which, combined with positive macroeconomic news, has led to greater investor optimism. Of particular note was the widely publicised Apple event last week, when the company launched three new products: the iPad Pro, the iPhone 6S (and 6S plus) and a new iteration of Apple TV. The 6S has a faster processor, a better camera and a new feature called 3D Touch, which lets users navigate more quickly between different functions depending on the amount of finger pressure applied to the screen. Apple’s share price initially fell but rebounded later in the week. All the leading international equity indices closed higher Thursday than they did last Friday. The sharpest rises were recorded in Asia and in the technology sector. Accordingly, the NASDAQ rose 2.4 per cent compared to average increases of 1.5 per cent to 2 per cent on the majority of the other stock exchanges. Most European stock exchanges were back in negative territory this morning, however.
AEX lags despite positive news from Heineken and Boskalis
In the Netherlands, Heineken has announced it will acquire a 50 per cent stake in the American brewing company Lagunitas. The country’s fifth-largest brewer, Lagunitas will give Heineken access to the American premium beer niche market. Boskalis, for its part, has reported impressive results for the first half of the year, boasting a number of offshore energy projects and the successful completion of its Suez Canal project. We have thus upgraded our rating for Boskalis shares from “hold” to “buy”. At 436.21 points, the Amsterdam Exchange Index (AEX) closed 0.8 per cent higher on Thursday than it did last Friday, lagging the average rate of other European markets (1.8 per cent).
Macro news to predominate next week
Although no corporate news is expected in the coming week, there will be plenty of macro news. I’ve already touched on the Fed’s upcoming meeting, which is sure to have more of an impact on stock markets than Budget Day (or Prinsjesdag) here in the Netherlands will. News on the Fed’s policy meeting will predominate, although we don’t expect it to announce a change in interest rates. We’ll also be eagerly awaiting macro data from China, including retail sales and industrial production for August. Also on the agenda are inflation data from a number of countries, including the US, the UK, Italy, France and the European Union as a whole. The ZEW Index, which gauges investor sentiment with respect to the German economy, and that of Europe as a whole, is always interesting. We’ll be expecting data on retail sales in the US, the UK and the Netherlands, as well as industrial production data from the US and the eurozone, all from August. Also anticipated are important Dutch consumer confidence data in September and the Philadelphia Fed Report, the first indicator in September for industry in the Philadelphia area, which also serves as a reasonable industry measure for the US overall.