Following a pick-up in the economic cycle in emerging Asia over the summer, the industrial sector in developed countries is now also showing signs of recovery – with related movements in the financial markets, and particularly the bond markets.
These trends also reduce the safe-haven attraction of the bond markets in the United States and the eurozone core countries.
Ben Steinebach Head of Investment Strategy
Purchasing manager sentiment in industry and services is one of the key indicators flagging a recovery, and in October it improved more than generally expected in most countries and regions. PMI indices are now comfortably ahead of the 50 mark – i.e. the threshold above which growth in activity is expected – and purchasing managers are apparently now expecting such growth to gain traction. Germany’s Ifo index is another such gauge, and a broader measure of confidence among German businesses. It rose to 110.5 in October, compared with 109.5 in September. Improved confidence, now also becoming visible in manufacturing and spending statistics, has not fully percolated through to the corporate earnings numbers currently being posted for the third quarter and will probably show up in fourth-quarter results at the earliest. The bond markets, by contrast, have been quick to reflect the change, while other factors are also serving to cause upward yield pressures.
Striking one-week yield increase
With the exception of Japan, virtually all bond markets recorded significant yield increases. Whereas the US Treasury market saw a ‘mere’ 10 basis point upturn in 10-year yields, most European markets notched up gains of between 15 and 20 basis points, a fairly steep increase in the course of a single week. Better economic prospects contributed, of course, as these should boost borrowing demand, but a couple of other factors also came into play. For one thing, it is becoming increasingly likely that the US Federal Reserve will raise its key interest rate, i.e. the Fed funds rate, in December.
Secondly, brighter economic conditions in the eurozone are feeding expectations that the European Central Bank might cease its strong stimulus policies somewhat earlier than hitherto expected. These trends also reduce the safe-haven attraction of the bond markets in the United States and the eurozone core countries. Europe’s periphery, by contrast, is seeing risks mount: the outcome of the 4 December constitutional reform referendum in Italy is anything but a foregone conclusion, as it’s taken on the shape of a popularity poll about PM Mario Renzi. And investors increasingly see high government debt levels in Portugal and Italy – and to a lesser degree also in Spain – as a key risk.
Philips records healthy results in medical technology
In the past week, a veritable deluge of companies reported their third-quarter results – a somewhat mixed bag, though the general gist of the news was a tad more upbeat than in the second quarter. More often than not, though, even reasonable profits went unrewarded by share price increases. General Electric, which is typically cited as a good mirror of the state of the US economy, recorded third-quarter earnings per share a little ahead of the 30 cents generally forecast, at 32 cents. At USD 29.3 billion, revenues dipped somewhat below the projected USD 29.6 billion and the company cut its revenue forecasts for full 2016. By contrast, Google parent Alphabet’s revenues did beat expectations and clocked in at USD 18.3 billion, earning USD 9.06 per share, 45 dollar cents more than expected. Among pharmaceutical companies, Bristol Meyers was rewarded for solid figures, which showed earnings per share 12 cents ahead of expectations at 77 dollar cents. In the banking sector, Deutsche Bank was hit less than the markets had been fearing: a profit of EUR 256 million instead of a forecast loss of EUR 394 million. BNP Paribas and UBS also reported positive results.
On the acquisition front, AT&T’s proposed USD 85 billion-plus takeover of Time Warner turned heads, while Holland’s NXP is about to be snapped up by Qualcomm for USD 110 per share. Philips locked in healthy figures with a 2% rise in sales to EUR 5.9 billion, even if its sales were depressed by a disappointing performance at Lighting, in which Philips still holds a majority stake. With this stripped out, its sales would have grown by 5%. In fact, net income even added 18% on the year-earlier figure and came in at EUR 383 million. International equity indices generally closed Thursday a little below the previous Friday’s showings. The AEX was no exception and its 0.37% loss to 455.71 put it in the middle of the pack. By Friday morning all European stock markets were recording losses and the AEX was at 450.
Another busy week ahead
Fewer companies are slated to release results in the week ahead than in the week just past, though there are still quite a lot of names on the results calendar. A slew of macroeconomic data is also expected, the key focus points being the Federal Reserve, the Bank of England and the American jobs and joblessness figures due out on Friday. Corporate result highlights of the week include US players such as Facebook, Starbucks and Qualcomm (which is acquiring Dutch company NXP) as well as Time Warner (to be taken over by AT&T). A number of high-profile energy names are also publishing their results in the week: Duke Energy, Marathon Oil, Noble Energy and Anadarko. In Europe, eyes are trained on the likes of BMW, Adidas and bank plays such as Société Générale, Credit Suisse and Commerzbank, while in the Netherlands the spotlight will be on Koninklijke Olie/Shell, ING, DSM and Air France-KLM.
Macroeconomic news in the week will include the Federal Reserve policy meetings on Tuesday and Wednesday and that of the Bank of England on Thursday. Many countries will also release their up-to-date figures on purchasing manager sentiment, while virtually all European countries are set to publish their provisional GDP projections for the third quarter as well as initial inflation forecasts for the eurozone in October. September retail sales numbers are due out in Japan and Germany, while the United States will report total consumption and income for the same month . Other than that, labour numbers will claim centre stage in the week, with new September employment and unemployment figures out for the European Union, Germany, Italy and Belgium, while to top things off the United States is also scheduled to release jobs figures – in its case for October – on Friday.