Prices on the global stock markets continued to fall last week. The Chinese markets – initially the epicentre of the anxiety – were closed all week to celebrate the start of the new year. Bond rates fell sharply on markets that are perceived as safe havens.
Op macrogebied is het niet een heel drukke week en de bedrijven, die hun resultaten publiceren, zijn ook niet (meer) de meest aansprekende.
Ben Steinebach Head of Investment Strategy
The continuing anxiety on the stock markets is difficult to explain, considering the fundamental developments. No news was reported from China last week, where the markets were closed to celebrate the start of the Year of the Monkey. On Thursday oil prices fell further, though barely below the lowest levels of mid-January. In the United States the indicators are not typical of recession. Where the relatively strong dollar was perceived as a cause for some of the weaknesses, last week the US currency lost some ground, which was interpreted as a sign of economic downturn.
The inconsistency of the arguments indicates that investors are nervous and worried and are looking for the associated reasons for the confusion. Consistent communication by policymakers is vital. In previous instalments of this blog I already commented on the unfortunate communications and policy responses by the Chinese authorities. Last week Federal Reserve Chair Yellen, in a speech before Congress, also failed to offer a cut-and-dried explanation of her plans to help counter the anxiety. We expect that she will do so shortly, though, and that she will then announce that the three rate hikes that the Fed had planned for this year will be put off until 2017. If so, the main reason will be the anxiety that prevails internationally. We do believe that the favourable position of consumers – who represent three quarters of the US economy – will prevent the United States economy from going into recession in the short term. Job prospects are still very good, unemployment is extremely low, the income and debt positions have improved and (partly as a result) consumer confidence is healthy.
Unequal spread of responses to falling oil prices
The extremely low oil prices are more the result of the very large supply volumes than of a diminishing demand. By itself this is good news for energy users (consumers and companies), as it considerably increases their purchasing power.
However, spending is not yet rising much, in part as a result of the increased uncertainty. At the same time, the losers (oil-producing countries and oil companies) are rapidly adapting to the changing situation. Companies in the extensive US energy sector in particular are disposing of assets and curbing back investment plans – another trend that is negatively impacting the US economy to a degree.
The high level of anxiety on the markets is again driving investors to bonds, particularly from countries that are perceived to be very safe havens. The 10-year yield in the United States fell by 22 basis points last week to 1.64%, while in Germany the corresponding rate was down 13 basis points to 0.18%. Dutch and French yields fell only 10 and 5 basis points respectively. On the evidence, Spain and Italy are not perceived as safe havens: the 10-year yields in those countries actually rose by 12 and 19 basis points respectively. It is unclear what the central banks can do to counteract the anxiety; in our view they still have a considerable range of tools at their disposal. The Federal Reserve could limit its rate hikes, and the ECB could further extend the duration and intensity of its current bond-buying programme. In reflection of all this uncertainty and worry, the price of gold – as a perceived safe haven – also rose, climbing more than 8% last week and bringing the total increase this year to 17.5%.
Deutsche Bank at the centre of attention
Banks were under particular pressure on the stock markets last week. The European markets were hit much harder than their US counterparts, despite the concerns among investors about the state of the US economy.
In the United States, the markets lost an average of 2.5% to 3.5% of their value last week. Losses on the European markets were much greater, ranging from 5.5% to 7.5%, with markets in southern Europe even plummeting 8.5% to 9%. Disappointing data about industrial output (in Germany, Italy and France) in December was presumably a factor in Europe, and the fairly encouraging Q4 economic growth reports were evidently unable to counteract this effect.
The reports of corporate earnings were a mixed lot, both in the United States and in Europe. PepsiCola illustrates this contradiction within a single company: despite pressure on the company’s Q4 revenue (7% down relative to a year before), owing largely to the strong dollar, its operating income was nevertheless up by 10%. Banking stock fell, owing to concerns that the negative interest rates now prevailing in many countries will force interest margins down. Nevertheless, Deutsche Bank – the focus of most of the largely negative attention – managed to climb 10% on Wednesday after announcing plans to buy back its own bonds. In Amsterdam Heineken published very favourable earnings (showing a 16% increase in pre-tax income), yet its stock lost more than 3% in the general slump. AKZO Nobel also saw its earnings meet with less than enthusiastic response, despite having exceeded its targeted profitability. On Thursday the AEX closed on 382.61, down by more than 7.5% relative to the Friday before: one of Europe’s largest losses. By Friday morning the index – following the other European markets – was more than 1% higher, at 387 points.
Chines market to reopen after a week
The Chinese market was set to reopen on Monday, with the US market staying closed for President’s Day. Little macro news is expected this week, and the corporate earnings scheduled for announcement will not generate much excitement.
China will publish information about its international trade in January this week, which always draws a great deal of anticipation. Data will also be presented about price performances in the United States, the United Kingdom, France and Italy. New figures about the housing market in the United States will also be announced, including the number of housing starts in January. The Netherlands will release data about unemployment and consumer spending in December and about consumer confidence in February, while the corresponding indicator will be announced for the European Union as a whole. The most important international companies scheduled to publish their earnings this week are Schneider Electric, Nestlé, Allianz, Wal-Mart, Priceline, Vivendi and Credit Agricole, with Air France-KLM being both international and domestic for the Netherlands. In the Netherlands we look forward to the results of DSM, Randstad, BAM, Ordina, Aegon, Arcadis and TNT-Express.