Last week again saw the financial markets in high spirits. Yields on the bond markets fell worldwide, and the sentiment on the stock markets was dominated by the improving economic outlook.
The danger of a Greek exit from the eurozone appears to have been averted.
Ben Steinebach Head of Investment Strategy
One of the factors causing bond yields to fall was the bond-buying programme that the European Central Bank (ECB) is set to launch, which has triggered a run on bonds. Another factor was the agreement with Greece: although many of the details have yet to be negotiated, the danger of a Greek exit from the eurozone appears to have been averted. Greece’s new government drew up a list of plans early in the week that President Dijsselbloem of the Euro Group will see as a viable basis for the forthcoming negotiations. The main focus is on tackling corruption in Greece and improving tax ethics. Another decision, and one that goes against the original wishes of governing party Syriza, is not to reverse the privatisation plans. It is also worth noting that the IMF and the ECB – two of the organisations making up the Troika that Greece’s government so despises – have announced that the plans are inadequate and offer insufficient guarantees that Greece’s economy and public finances will improve.
However, the agreement in principle helped to push down interest rates, more so in Southern Europe than elsewhere. Another factor was the ECB’s forthcoming bond-buying programme, which will force prices of bonds up further. Investors are anticipating this by buying up bonds on a large scale while they are still cheap. The future scarcity is carrying over to numerous other segments of the bond market: both on the regional level (for example the United States) and the market for corporates.
The further decline in interest rates also buoyed the stock markets, with prices understandably climbing more strongly in Europe than in the US. The by and large encouraging macroeconomic data that were published were another contributing factor here. The economic upsurge was evidenced by figures released both in the United States (purchasing managers index and the orders for sustainable products) and in Europe (real money growth and, again, the purchasing managers index). Lastly, Fed Chairwoman Janet Yellen spoke before the US Senate and House of Representatives, reporting on the encouraging state of the US economy and explaining that she did not consider a rapid hike in the federal funds rate to be necessary. Nevertheless, we expect it to be raised in June this year.
European markets steal the show
While the US stock markets achieved new all time highs last week, they were again visibly outperformed by Europe’s markets. The main cause is still the ECB’s stimulus policy: similar to what the US experienced in previous years, the abundant flow of cheap money (even though it has yet to start) in the eurozone is putting pressure on interest rates, weakening the currency and causing an upsurge in stock prices. Europe’s economy is expected to recover strongly during the coming years, which may then justify the higher stock prices. This recovery was also reflected in an array of different macroeconomic indicators last week. The economic sentiment indicator – a combination of consumer confidence and producer confidence – continued its climb in February, and was in fact positive in Greece for the first time in a long time. At 53.5, the purchasing managers index – an important measure of future economic growth – also drew further away from the ‘neither improvement nor decline’ level of 50.
However, the earnings (for Q4 of 2014) that were published in Europe were varied. Insurance giant Allianz reported disappointing results. This was caused largely by the departure of Bill Gross from the board of Allianz subsidiary Pimco, the world’s largest bond fund, which normally represents a quarter of Allianz’s operating income but now saw EUR 232 billion flow away through Gross’s departure. Ahold’s income similarly fell short of expectations, despite the buoying effect of the strong dollar on the company’s earnings. Its profit margins have been on the decline for some time now and will come under further pressure, particularly as Albert Heijn has been instructed to increase its market share. PostNL’s earnings conversely outperformed expectations, largely as a result of a strong growth in Parcels: increasing Internet sales are causing the number of parcel deliveries to rise, balancing the decline in letters. The AEX gained an impressive 2.7% last week, climbing to 482.47 (on Thursday) and outperforming the other leading European stock indexes.
Macro data to be the driving force this week
With most companies having already published their Q4 earnings, the financial markets will be forced to rely on other news sources for direction. However, a small rearguard of companies will be announcing their results. In the Netherlands the most prominent of these are Vastned Retail, ASMI and SIM card manufacturer Gemalto which, despite actually being a French company, is listed on the AEX. It was in the news last week with reports that data on SIM cards had been hacked by the NSA. Companies in the international arena scheduled to announce their earnings this week include Barclays and Standard Chartered.
The most telling news will be on the macro side, and will include final data on the sentiment among purchasing managers in a range of countries. Further news that will draw much interest will be the initial estimates of inflation in the eurozone in February. The expectation is that prices have continued to fall, though the return of inflation (albeit minor) in Germany that was announced on Friday morning offers some encouragement. Germany will also be publishing data about industrial orders in January, which may provide information about the developments in the German economy as the principal driver of the European economy. This is also true of retail sales, details of which will be published for Germany and the European Union as a whole for January. The week will close with the publication of February’s job market figures in the United States on Friday, specifically non-farm employment and the unemployment rate. Expectations are high for both, with the former growing by 235,000 jobs and the latter falling to 5.6% of the working population (against 5.7% in January).