Markets still licking their wounds after ECB’s disappointing move

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The global financial markets had not yet processed the ECB’s disappointing measures announced on 3 December this past week. Share prices continued to fall and investors sought safety in the bond markets, where yields came down again.

In the global bond markets, risk aversion among investors led to higher prices and, consequently, lower yields Ben Steinebach Ben Steinebach Head of Investment Strategy

Although there was little guidance this past week, the mood in the financial markets remained cheerless. The United States published numbers that generally confirmed moderate economic growth. There has been a striking difference for some time now between the well-performing services sector and weak growth in the industrial sector, where the strong dollar is limiting export opportunities. Still, we think industrial production will soon grow more sharply, as stocks are being reduced too quickly due to sustained domestic demand. In the past week, Japan and the European Union published two economic growth forecasts for the third quarter; both came to 0.3% growth compared with the second quarter, which was good news for Japan and a slight disappointment for the European Union. In China, export growth contracted again in November compared with last year, though less rapidly than in the previous month (18.8% in October against 8.7% in November). Industrial orders placed in Germany from abroad (outside the European Union) confirm domestic demand in China. Orders for capital goods in particular recovered strongly in November, and these orders undoubtedly came primarily from China. To sum up, we can conclude that the figures published this past week can hardly be held responsible for the recurring malaise in the global equity markets.

Chronicle of an announced interest rate hike

In the global bond markets, risk aversion among investors led to higher prices and, consequently, lower yields. In the core countries of Europe, yields are now negative for maturities up to five years. In the European periphery, meanwhile, positive yields can be achieved compared with cash, but only at the long end of the yield curve. Corporate bonds are a good option, but they also involve more risk. This applies mainly to (high-risk) high-yield bonds, especially US high-yield bonds. Shale gas firms which, owing to low energy prices, present a higher risk are relatively highly represented in this asset category.

The UK and Swiss central banks held their monthly policy meetings last week, but kept interest rates unchanged. We do not expect this to be the case with the US Federal Reserve, which we think will raise the Fed funds rate this coming Wednesday from 0%-0.25% to 0.5% -- the best announced interest rate hike.

Markets not inspired by mergers and acquisitions

There were plenty of rumours in the equity markets last week, plus news on mergers and acquisitions – all of which normally drive up prices, but even this failed to perk up the markets. Dow Chemical and DuPont, for example, are rumoured to be discussing a merger. The new group would be split up into agro-chemicals and seeds, plastics and special chemical products. Pressured by this imminent merger, ChemChina supposedly wants to raise its offer for Syngenta from CHF 42 billion to CHF 44 billion. General Electric, meanwhile, is in the advanced stage of talks with energy provider Halliburton on the acquisition of its drilling operations. Halliburton has to sell these activities if it wants to merge with Baker Hughes. In the Netherlands, TenCate received attention from a consortium of Gilde and Parcom as well as from HAL. TenCate apparently declined to talk to HAL about a participating interest in the company. The AEX closed off Thursday 2% lower than the previous Friday, at 437.84 points, making it one of the poorest performing indices in Europe. This morning the index fell further to just under 435 points.

All eyes on Janet Yellen

There is very little corporate news on the agenda for this week. On the macroeconomic front, we can expect some interesting news on industrial production and inflation. All eyes will be on the Federal Reserve, though, which will take a decision about interest rates this week. On Wednesday at 8.15 am CET, Fed Chair Janet Yellen will announce whether – as we expect – the Fed funds rate will be raised for the first time in nine years.

We also expect some interesting macroeconomic figures in the week ahead. Some choice examples are the ZEW index (which indicates how investors view investment opportunities in the German and European economies) and the Ifo Index. The latter is the best indicator of confidence among German businesses. Belgium, too, will publish business confidence figures. This index is a good indicator of confidence in the rest of Europe. Data on industrial production in the United States and the European Union will also be published this week, which could shed light on the difference between the two regions. Definitive figures on inflation will be announced for the United States, the European Union, the United Kingdom and Italy. These will presumably not differ significantly from the initial estimates, which were published last week. It will be interesting to see the data on wage costs, which will be published for the European Union, the Netherlands and the OECD this week. We hope that retail sale figures, to be presented in the United Kingdom and the Netherlands, will confirm satisfying growth of domestic spending. Data on consumer confidence in the Netherlands are also in the pipeline. And lastly, initial estimates on the mood among purchasing managers in both the industrial and services sectors – a good indication of business confidence – will be presented in December in many countries. In short, we’re looking at a full agenda, but the spotlight will be mainly on the Fed and Janet Yellen.


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