Markets struggle for direction

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The global financial markets fluctuated last week, finding little inspiration in the encouraging macroeconomic news. The lack of direction was amplified on Thursday, when the US markets were closed for Thanksgiving.

Last week’s macro data were remarkably encouraging, both in the United States and in Europe Ben Steinebach Ben Steinebach Head of Investment Strategy

The mood was also affected by geopolitical tensions: the aftermath of the Paris attacks, the threat of further attacks in Brussels and the tensions between Russia and Turkey. Although it is difficult to estimate how much bearing these factors have on the financial markets, they do not foster an upbeat sentiment. The announcement that the results of Chinese industrial companies fell significantly in October, relative to both September and the year before, also had an adverse impact on the sentiment, with the Shanghai exchange plummeting 5.5% last Thursday. The European markets outperformed their US counterparts as the week progressed, largely thanks to a surge on Thursday, when the US exchanges were closed for Thanksgiving. On Black Friday the US markets were closed for half the day, to reflect the American tradition of starting their Christmas shopping. That day is always taken as an indicator for retail revenues, though it is doubtful whether this will continue: with the focus shifting to web-based shopping, retail spending no longer offers a complete picture.

More good macro data

Last week’s macro data were remarkably encouraging, both in the United States and in Europe. In the United States, new residential sales and orders for durable goods recovered in October following the lower figures in September. At 0.4% in October, personal income growth outperformed the forecasts and the sentiment among purchasing managers in the services sector climbed to 56, well above the ‘neither contraction nor growth’ level of 50. Consumer confidence continued its upward trend in November. Following the upsurge in employment figures published earlier in November, the data for the US economy have improved remarkably. In Europe too the macro data were largely encouraging – with competitiveness improving as the euro continues to slide against the US dollar, this trend appears likely to continue. The favourable developments are best illustrated by the increase in the volume of money in the eurozone: loans to companies and households rose by more than expected, indicating a higher level of confidence among both groups.

European Central Bank to consider a new policy

The European Central Bank (ECB) has scheduled a press conference for Thursday, where the Bank is expected to announce a decision to increase the volume of its bond-buying programme (from EUR 60 billion to EUR 80 billion per month) and to extend the programme’s duration. Comments made by members of the ECB’s board hint at an exploration of new forms for further lowering its the deposit facility rate, which currently stands at -0.2%. Possibilities that are being considered include different rates for larger and smaller deposits. The major systemically important banks in particular have prefer to place large deposits with the ECB, and will then face higher negative rates (i.e. they will have to pay the ECB more interest). In the United States, we predict that the Federal Reserve will raise the Fed Funds Rate to +0.5% (up from 0%-0.25% at present) midway through December; the anticipation is already visible in the higher money market interest rates.

A busy period for M&A news

Pfizer’s acquisition of Allergen last week was the third largest takeover in history. Announcements and rumours about mergers and acquisitions also emerged in the Netherlands. Pfizer bought Allergan for 160 billion dollars to create the largest pharmaceutical company in the world, with an estimated revenue estimated in excess of USD 60 billion. The transaction has been structured in such a way that technically Allergan acquired the much larger Pfizer. This enables Pfizer to relocate the company’s head office to Ireland (where Allergan is based) to benefit from the much lower corporate income tax rate (12.5% against 35% in the United States). In the Netherlands, the merger between Ahold and its Belgian counterpart Delhaize appears to be on schedule. The transaction is expected to finalised mid-2016. Presumably some of the US operations will be spun off to appease the US anti-trust authorities. Rumours have emerged of a merger or acquisition involving Nationale Nederlanden (NN), which announced that it is exploring acquisition as one of its options if its organic growth falls short. A rumour immediately surfaced that Delta Lloyd is an obvious target.

Further corporate news came from Shell, which has decided to put a major CO2 storage project in Scotland on hold for the present. The most important reason was the British government’s move to cancel a GBP 1 billion grant for which Shell was competing. Most of the European markets gained between 0.5% and 2% relative to the Friday before last. The AEX underperformed slightly compared with the leaders, climbing 0.76% to 472.24, thanks chiefly to an upsurge on Thursday. On Friday morning the index dropped marginally to 471.50.

The week of the ECB and OPEC

The most important news this week will be the ECB’s announcement of its policy plans. The OPEC countries are set to meet to discuss oil prices. It will also be a busy week for macroeconomic news. Reports about consumer confidence in Germany and in the United Kingdom are much anticipated, and a series of countries are set to publish details of the sentiment among purchasing managers in both industry and the service sector. These finalised data are expected to be largely identical to the provisional figures presented over the past two weeks. This week will also reveal numerous data about price trends in various countries: the most important will be the announcement for the eurozone on Wednesday. Coming just a day before the ECB’s press conference, this will draw extra attention. Data about retail sales in Germany and in the eurozone are also anticipated, as are unemployment figures in both these regions. The week will end with Germany’s industrial orders (for October) and – to end the week with a bang – data about jobs and unemployment in the United States for November.

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