Increasing tensions in the Middle East, and their impact on oil prices and other economic drivers, caused stock markets around the world to fall last week. Encouraging macro data from Europe were not sufficient to counteract the effect, owing in part to the euro’s slight recovery.
The financial markets are now visibly feeling the impact of the concerns about how the conflict will develop.
Ben Steinebach Head of Investment Strategy
On Thursday, the leading indexes in the United States closed approximately 2.5% lower than the Friday before, while in Europe on the whole the losses were less spectacular. The principal factor causing these drops was the increasing tension in the Middle East, where the Sunnis in Saudi Arabia launched a series of air strikes against the rebel Shia Houthis in Yemen. This forced oil prices up by 5% on Thursday relative to Wednesday. Although Yemen’s own oil output is relatively insignificant (representing only 0.2% of the global production), the situation is exacerbated by the country’s close proximity to the vital Bab el Mandeb Strait leading to the Gulf of Aden. In a break from the pattern of the first three months of the year, the financial markets are now visibly feeling the impact of the concerns about how the conflict will develop. They are also affected by the situation in Greece. Where so far the stock markets had remained indifferent to the increased tensions, they are now somewhat anxious about what is beginning to look a lot like a bank run: the number of withdrawals in February – EUR 7.3 billion – was much higher than during the crisis in 2012. Although a crisis would benefit neither Greece nor the eurozone, considering the bravado displayed by the country’s new government the possibility should not be ruled out that something unforeseen will happen.
A large amount of encouraging macro data about Europe’s economy was presented last week: consumer confidence in the eurozone and Germany outperformed forecasts, and in Germany the Ifo Indicator – a very important measure of business confidence – also continued its climb. Even more significantly, perhaps, was the improved rate of increase of money in circulation, while lendings to the business sector are also improving. The euro recovered slightly against the dollar, from USD 1.05 on 13 March to USD 1.09. This climb was caused largely by the revised predictions for the timing of the first rate hike in the United States (September rather than June) following the most recent meeting of the Federal monetary policy committee FOMC. However, the encouraging macro data in Europe undoubtedly also contributed.
AEX further away from the 500 mark
The rising euro and the increased geopolitical tensions caused Europe’s stock markets to take a step back. Profit-takings, in particular in the technology sector, also contributed. In Amsterdam preparations for a new IPO began last Friday. The AEX was one of Europe’s larger losers last week: while most of the leading European indexes managed to limit their losses to around 1.5%, the AEX fell more than 2.5% and on Thursday closed at 486.37, moving considerably further away from the psychologically significant barrier of 500 points. This once again demonstrates how sensitive Amsterdam’s index is to changes in the dollar exchange rate. The announcement that the Dutch economy had recorded a significantly faster growth over Q4 of 2014 (0.8% relative to Q3 rather than 0.5%, as had been announced previously) was not enough to counteract this impact.
Chip machinery manufacturer ASML was the largest loser, with its stock plummeting 10% over two days, while in the same sector ASMI and BESI also recorded substantial losses. The relatively strong declines in the technology sector – caused chiefly by profit-takings – was also visible on the Nasdaq: the US technology exchange lost more than 3% last week, compared with the 2.5% losses of the Dow Jones and the S&P 500, for example. Amsterdam’s exchange heard news that Boskalis had increased its stake in Fugro from 20% to 25%. One factor here was that Fugro’s listing on the AEX was terminated and more shares came onto the market. However, we expect that it will be some time yet before Boskalis can complete its takeover of Fugro, which is why we have downgraded our rating for Boskalis from ‘buy’ to ‘hold’. In last week’s other M&A news, Berkshire Hathaway (with Warren Buffett at its helm), together with Brazilian private equity company 3G, spent USD 10 billion to take a 51% stake in the newly formed Kraft Food/Heinz combination. A new company will be floated in the Netherlands shortly: last Friday subscription for stock in juices and soft drinks producer Refresco began, at a price of EUR 14.50 per share (bringing the market capitalisation to approximately EUR 1 billion). The ‘as-if-and-when-issued’ period ends this week Monday, and the official listing will commence on Tuesday, 31 March.
Market developments to be dictated largely by macro news
The earnings season is now well and truly over, and investors will have to wait until mid-April before the first companies publish their Q1 earnings for this year. However, the market will be inundated by macro data. The most important news this week will be the sentiment among purchasing managers: the final data for March in a wide range of countries, in Europe as well as in the United States and Asia. We expect Europe to show the greatest improvement, though still at moderate levels. In the United States a drop relative to February remains a possibility, though the levels will in fact be somewhat higher. Japan’s Tankan Index concerns the same drivers, and is released on the first day of every new quarter. Other information that will be published early in the week is the European Union’s Economic Sentiment Indicator, a combination of consumer and producer confidence in the Union. The United Kingdom, Italy and the United States are also set to present data about confidence among consumers, while Japan will publish new data about industrial output and the United States will publish details of its factory orders. New information about current consumer prices in Germany, Italy and the European Union will also be presented, which should reveal whether the deflationary trends are showing signs of diminishing. Germany will also publish data about unemployment in March and about retail sales in February. The United States will present the personal income and outlays. As usual for the first Friday of the month, the week will end with US jobs and unemployment data for March.
As this Friday is Good Friday, followed by Easter weekend, no Investment News will be published this week. Any important news that occurs in the coming week will be discussed in the next edition.