Brexit shadow looms over the financial markets

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The global financial markets became increasingly uneasy last week. The principal cause this time was the greater likelihood of a Brexit as indicated by polls and at betting shops. Germany’s 10-year yield continued to fall, moving into negative figures.

The FOMC, the Fed’s policymaking committee, decided last week to maintain the most important interest rate within the current bandwidth of 0.25-0.5%. Ben Steinebach Ben Steinebach Head of Investment Strategy

By Thursday Europe’s stock markets were down between 3% and 4.5% relative to the week before. Curiously, the British market lost only 2.75%. In the United States, losses during the same period were smaller, at less than 1%. In the week before the markets’ losses had been caused principally by question marks surrounding the strength of the global economy. This week the chief cause of the downbeat sentiment was the increased concern that this Thursday’s referendum in the UK will lead to a Brexit. In the polls, the Brexit campaign is extending its lead over a Bremain (staying in the European Union), and at the betting shops the latter’s lead is shrinking. It remains to be seen whether the brutal murder of MP Jo Cox (an advocate of ‘staying’) and the temporary halt to the separate campaigns will change this situation. However this turns out, last week it caused uncertainty to soar to new levels, making investors less inclined to take risks. If the referendum leads to a Brexit, British companies will postpone their capital investments, which will slow down economic growth. The economic climate will suffer further damage from the years of protracted negotiations between the United Kingdom and the European Union that will follow.

Federal Reserve does what was expected

The FOMC, the Fed’s policymaking committee, decided last week to maintain the most important interest rate within the current bandwidth of 0.25-0.5%. This was expected, with the situation on the labour market having deteriorated – for example, job numbers increased only marginally in May. Nevertheless, the Fed barely lowered its economic projections. It did however lower the projected number of rate hikes during the coming years: it now expects a much lower number than was originally assumed, one that is more in line with the average expectations on the financial markets. Overall the economic data published in the United States and Europe last week was very encouraging, yet its impact on the stock markets was minimal. The Fed and the shadow of a Brexit dominated the mood, and the European Central Bank added to the severe pressure on bond yields through its bond purchases (including corporate bonds). Germany’s bond yields on maturities up to seven years were already negative, and last week this carried over to ten-year yields: 60% of bonds in Germany now yield negative interest.

Stock markets unmoved by corporate news

Little corporate news emerged last week in the form of earnings reports. Microsoft’s takeover of LinkedIn naturally created some excitement, though besides the stock of those two companies themselves the news barely affected the markets. Microsoft is prepared to pay USD 26.2 billion for professional networking site LinkedIn. This represents a 50% premium for a company that has been underperforming on the markets. In February its stock fell 40% in a single day, when the company announced that it would be unable to realise its forecasts for 2016, and the company has still not made a full recovery. Unsurprisingly, the news of the takeover caused LinkedIn’s stock to surge by more than 45% while Microsoft’s fell 2.5%.

The only prominent company that published its Q1 earnings last week was Oracle. Despite a 1% drop in revenue compared with a year before, its earnings were for the remainder more or less as analysts had expected. A 4-5% increase in revenue is projected for the coming quarters, based entirely on cloud services. As those services represent only 10% of Oracle’s total revenue, this will require them to grow explosively, and in a market that is dominated by Microsoft and Amazon. The AEX closed at 418.51 points on Thursday, about 4% down from the Friday before. Friday morning saw a slight recovery, as on other stock exchanges, with the Amsterdam index fluctuating at around 422 points.

This week’s sentiment to be determined by the UK referendum

A small number of companies have yet to publish their Q1 earnings this week. The initial estimates for the purchasing managers’ sentiment are also eagerly anticipated. However, the main focus will of course be on the United Kingdom. The companies announcing their income and revenue this week might not be heavyweights, but Fedex, Carnival and Hennes & Mauritz are widely-known brands. Consultancy firm Accenture and Belgian supermarket chain Colruyt are also scheduled to publish their earnings.

In macroeconomic news, the sentiment among purchasing managers will draw the greatest amount of attention. Most countries will be announcing their initial July estimates for this indicator. The ZEW Index for June in Germany (and Europe) will also be published. This index shows how investors view investment possibilities in the German and European economies. The Ifo Index for June will also be published this week, being the principal measure of business confidence in Germany. In the United Kingdom and in the United States, new data about consumer confidence in June will be released, as will durable goods orders in the United States and Italy. Lastly, new information about construction spending will be published in the European Union and Italy. Yet however exciting this data is, it will be completely overshadowed by Britain’s referendum and the announcement of the results on Thursday night.


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