A few weeks ago, the global stock markets closed much higher after employment in the US was reported to have grown far beyond expectations. Last week, however, concerns were fed by the disappointing data announced for the industrial sector in the United States and China and the falling prices of commodities, including oil.
Last week’s macro data was more varied than strictly poor
Ben Steinebach Head of Investment Strategy
The strong job growth in the US has significantly reinforced the belief that the Federal Reserve will implement its first rate hike before the year is out. Various Fed board members have also hinted at this, indicating an increasing consensus for next month. The resulting strong dollar would offer the European Central Bank (ECB) the latitude it needs to defer further intensification of its own policy for the present. However, nothing in President Draghi’s announcements points toward such a development just now. In a speech before the European Parliament, he repeated that the ECB is ready to take whatever measures are necessary if inflation does not rise rapidly enough. Even this reassurance was unable to improve the sentiment on the financial markets, however. The rapidly falling commodities prices – generally considered to be an indication of a weak global economy – plummeted even further, and particularly on Thursday depressed the markets.
Macro data: better than commodities prices suggest
Last week’s macro data was more varied than strictly poor. In Japan and the Netherlands, industrial output rose by more than expected, as did retail sales in the Netherlands and China. China’s investment growth also performed well. However, China’s international trade in China continued to decline (and contributed to a slow-down in the growth of world trade), while the country’s industrial output saw its growth rate drop further: down from 5.8% in September to 5.6% in October, which nevertheless is still one of the highest growth rates in the world. Last week’s reports of the growth rates for German and British industry were also disappointing. The initial estimates of Europe’s Q3 economic growth fell slightly short of expectations too: Germany and France were on target, yet Italy, the Netherlands, Portugal and Finland underperformed. In our view, the drop in commodities prices is caused mostly by speculative positions. With their number not likely to increase much, once the balance between actual supply and demand (for example for oil) starts to improve the prices might show a quick upturn.
Mixed bag of corporate earnings
With commodities prices falling, the stock markets also derived little support from the corporate earnings published last week. Aegon’s results in particular received a negative response from the market. In the international arena, the results of Siemens and Vodafone were better than expected, while Cisco’s were in line with the forecasts. In the Netherlands Ahold’s earnings were also on target: the company benefitted from the strong US dollar while also managing to increase its market share at home. However, the earnings published by Boskalis fell short of the corresponding figures from 2014, although by less than had been expected, and the company’s order book remains relatively busy. The greatest disappointment was the Q3 earnings report of Aegon, whose significant net loss of EUR 524 million was caused in part by underperforming earnings from life insurance in the United States. At the same time, it is still unclear what method should be used for measuring the company’s solvency. Most of the international stock markets closed around 2-3% lower on Thursday than they had the Friday before. The Japanese Nikkei was an exception, closing at more than 2% higher. With a loss of more than 2%, the AEX followed the international trend and closed just below 460 points. By Friday morning the index had fallen slightly further, to 457.
Bond markets affected by central banks
On the global bond markets, the changing expectations surrounding the policies of the Federal Reserve and the ECB in particular are an important factor. Interest rates rose in the United States, while in the eurozone they were again depressed. The expectation of a raise in the Fed Funds Rate as early as in December caused the US 10-year yield to climb above 2.3%. However, we expect that subsequent interest rate hikes will be minor and very gradual. Based on this assumption, we predict that the 10-year yield will be 3% by the end of next year. In the eurozone, conversely, interest rates are experiencing downward pressure, with the negative yields in Germany now spreading to the 5- and 6-year segment of the market for government bonds. A remarkable development here is that Spanish bond rates are rising: presumably political factors are behind this, such as the Catalonian independence movement, the upcoming parliamentary elections and – albeit indirectly – the political troubles in Portugal.
Earnings season virtually at an end
This week only three important companies will publish their Q3 earnings, and the focus will shift to macroeconomic news for now. The earnings season began in the United States, and will end there this week when Wal-Mart, Home Depot and Nike announce their earnings. A quiet week is also expected in terms of macro news. Against the backdrop of the central banks’ policies, it is interesting that the eurozone, the United Kingdom and the United States will all publish the finalised movements in consumer prices for October. Following Europe, the United States and China, Japan is now set to announce its Q3 economic growth. Germany will release the ZEW index for November, giving an indication of how investors view the German and European economies. Data will also be published about industrial output in the United States and about orders in the Netherlands. Consumer confidence data for in November will be published in the Netherlands, Belgium and the European Union as a whole, while consumer spending in the United Kingdom and the Netherlands will be announced. Lastly, the Conference Board’s leading economic indicator in the United States for November is much anticipated, as are last month’s Fed minutes.