Central banks dominate financial markets

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A measure of quiet has returned to the global financial markets and share prices are now fluctuating at higher levels. Central banks are working hard to promote calm and the United States is even clocking up fresh records. The minutes released by the US Federal Reserve revealed some difference of opinion between the members of the policy-making Federal Open Market Committee (FOMC) as to whether or not the Fed funds rate should be raised again before the year is out. The interest rate range may have been left unchanged at 0.25-0.5% in July, but many feel that rates should go up this year.

US economy are looking pretty good. Industrial output growth was back up and – as this sector is more energy-intensive than services – so were oil prices. Ben Steinebach Ben Steinebach Head of Investment Strategy

While this news may have kept sentiment in check on the US markets on Thursday, it failed to eat into the gains recorded since last Friday. There was a reason for this: prospects for the US economy are looking pretty good. Industrial output growth was back up and – as this sector is more energy-intensive than services – so were oil prices. Following June and July falls, the first two weeks of August saw Brent oil prices per barrel rise by 20%. This should particularly benefit the US oil industry, which has been deeply affected by persistently low oil prices.

Europe held hostage by geopolitical tensions

In Europe, geopolitical tensions continue to set the stage for the financial markets and its stock markets have lagged behind their US counterparts. Meanwhile, Spain is desperately seeking to form a government, a minority one if need be. If this fails, a new round of parliamentary elections would seem inevitable – the third in the space of one year. 

Germany is looking forward to September elections in the federal states of Mecklenburg-Vorpommeren and Berlin. Fears are that the right-wing populist party Alternative für Deutschland (‘Alternative for Germany’) will win a landslide victory at the expense of the parties now in government (CDU and SPD). This would make for a less governable situation and cast a dark shadow over the national elections in September 2017. 

And then there is Brexit for the markets to grapple with. Confidence indicators in both the United Kingdom and the rest of Europe took a massive hit in the early days after the vote. However, August has seen investment sentiment indices recover in Germany (ZEW) and Europe. Also, ‘harder’ indicators for production and consumption were less affected, both in Europe and in the UK itself. 

Meanwhile, the Bank of England (BoE) and the European Central Bank (ECB) are pulling out all the stops to maintain calm – and appear to be succeeding. The BoE has now cut interest rates from 0.5% to 0.25% and expanded its bond purchase programme. In its turn, the ECB has hinted that it is ready to increase its stimulus programme, and we expect it to do so in the month ahead.

Relative quiet in the equity markets

As we’ve noted, US equity markets notched up new records. This is hardly the case in Europe, but the mood has calmed down a lot from June and July. The results season is now virtually over.

Since the Brexit vote pushed equity markets to new lows on 6 July, share prices have made significant strides across the world. In the United States this has meant new records, but prices actually went up more in Europe on average. The German market, in particular, has recorded an impressive gain of over 13%. But at 7-8%, even other European markets enjoyed significantly better price gains than the 4% notched up in the US. 

Although the results season is virtually over, a trickle of companies released their second-quarter results in the week. BHP-Billiton , the world’s largest mining company, reported a loss for the first time since 2001: a negative USD 8.3 billion for the year ended 30 June 2016, compared with a year-earlier profit of USD 8.7 billion. The reason: low commodity prices. 

Dutch consultancy and secondment company Brunel also returned disappointing figures. Granted, second-quarter turnover was a little ahead of expectations at EUR 231 million, but profit fell behind and prospects weren’t encouraging either. 

Industry peer Randstad, by contrast, had good news to share. The European Commission saw no international competition hindrances to its proposed takeover of France’s Ausy, an international consulting and engineering company. The takeover will allow Randstad to tap into a pool of skilled technical staff, for which there is high demand in Europe. Randstad will be paying EUR 280 million for Ausy, which has a turnover of EUR 395 million. 

The AEX closed Thursday at 451.69, 0.5% down on the previous Friday. This morning, all European stock markets were in the red and the AEX was no exception: c. 0.75% down, to 448.50.

Focus shifts to macroeconomic news as results season ends

There’ll be a dearth of corporate results, but the week ahead should be a busy and rewarding one in macroeconomic terms. Central bankers will meet in Jackson Hole for their annual economic symposium from Thursday. Vivendi, Glencore and Gemalto are the only significant names slated to release their results. 

By contrast, there’ll be lots of macroeconomic news hitting the markets, much of it in the shape of confidence indicators. At the start of the week, preliminary PMIs for August will be announced in many countries, revealing whether or not sentiment has improved since its downturn in the wake of the Brexit vote. Fresh consumer confidence data for August are slated to be published for the European Union as a whole and for Germany, France and the United States (the latter by the University of Michigan). August producer confidence data for Germany (Ifo) and Belgium – often a good indicator for the rest of Europe – should keep market watchers occupied. Data on industrial production in Belgium and July industrial orders in the United States and the Netherlands rank among the ‘harder’ gauges in the week. 

We’re also looking out for fresh data on new and existing home sales in the United States, as well as follow-up projections for economic growth in the US, Germany, France and the United Kingdom. 

A great deal of attention will focus on the annual economic symposium in Wyoming’s Jackson Hole, hosted by the Federal Reserve Bank of Kansas. This year’s theme is ‘Designing Resilient Monetary Policy Frameworks for the Future’ – a seminal topic in view of persistently low interest rates across the world despite satisfactory economic developments. The conference should provide a useful forum for monetary policymakers to exchange views on this.

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