Disappointing US economy dampens sentiment

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Wall Street financial district

The financial markets had a poor week, marked by falls in prices in international equity and European bond markets. US bond yields rose slightly, partly as a result of a somewhat ailing economy.

Most remarkably, Apple, the stock market darling of yesteryear, reported its first ever drop in unit sales and revenue across the board. Ben Steinebach Ben Steinebach Head of Investment Strategy

Setbacks for the US economy were most palpable in the manufacturing sectors. After it was announced the week before that sentiment among purchasing managers in the manufacturing industry had slightly deteriorated in April, a number of new setbacks followed this past week. Durable goods orders rose by only 0.8% in March, compared to February, which had seen a decline of 3.1%. Furthermore, this figure was less than the expected 1.8% and does little to change the stagnation we’ve been seeing for quite some time. Housing market figures for March were also somewhat disappointing, as were a number of regional confidence indicators for the manufacturing industry. In the first quarter, the US economy as a whole grew by only 0.5% compared to the previous quarter. At the same time, it’s important to remember that this figure has been “inflated” to an annual growth rate, which means that actual growth barely exceeded 0.1%. Improved sentiment among purchasing managers in the services sector failed to balance out these setbacks, not least because consumer confidence unexpectedly deteriorated in April. Consequently, it was hardly surprising that the Federal Reserve’s policy committee decided not to raise interest rates (the federal funds rate). In March, the turbulent international context was cited as the reason for its decision to leave interest rates unchanged. No such reference was made now, although given the disappointing domestic indicators, it was hardly necessary. Japan’s central bank, too, stood aloof, despite expectations of further stimulus measures in that country. Accordingly, the market reaction was one of disappointment, with the Nikkei slipping as much as 5.2% last week. The most important figures coming out of Europe this past week were confidence indicators. The Economic Sentiment Indicator, which combines data on consumer and producer confidence in the European Union, saw something of an improvement in April after a three-month-long slump. The German Ifo index fell very slightly, and sentiment among purchasing managers – both in industry and in services – stabilised at a satisfactory level. Overall we’re seeing that the economies of more developed countries are going through a weak phase, but there is no evidence of a serious slowdown in economic growth.

A deep divide in the technology sector

Last week was the busiest in terms of the sheer amount of corporate results published which were variable and failed to indicate any clear trend. Internet and technology companies were in the spotlight last week. Most remarkably, Apple, the stock market darling of yesteryear, reported its first ever drop in unit sales and revenue across the board. Although the company is still very profitable, its earnings fell in the first quarter by more than USD 3 billion, to USD 10.5 billion. By contrast, Samsung Electronics, Apple’s biggest competitor in the smartphone and tablet market, managed to boost both its sales and its profits. Successful Internet companies continue to be Amazon and Facebook, while Microsoft and Twitter proved to be very disappointing. Amazon doubled both its earnings per share and its operating profit, its share price gaining 13.4% on the back of that news. Facebook had to make do with a share price rise of over 7%, but did produce better-than-expected results, thanks in part to increased advertising revenue. Among the Dutch companies presenting their first-quarter results were KPN, Randstad and DSM. Randstad reported slowing sales growth (from 6.6% in the last quarter of 2015 to just 5% in the first one of this year), confirming expectations. Its sales in the Netherlands were slightly better than expected, those in the US slightly less. Earnings before interest, tax and amortisation rose 15% to EUR 166 million in line with expectations. Investors were still disappointed, though, because the company is having to give up its profitable – high-margin – payroll activities. Their response to DSM’s results, on the other hand, was positive. DSM has benefited from a stronger demand for food ingredients and, consequently, a high margin. Its operating result increased by 20% compared to the year before, and the company indicated that it expects its results to continue to improve this year in line with its medium-term objectives. KPN presented results which were also in line with expectations, its management reiterating its previous outlook. KPN suffered most notably from falling demand from the corporate sector, but this was partially offset by an increase in consumer sales. On balance, its turnover fell by 4% – to EUR 1.7 billion – compared to last year. On Thursday, the Amsterdam Exchange Index (AEX) had slipped 0.27%, falling to 450.31 points, compared to last Friday. In an international context, the decrease was minimal, although there are a few countries (Spain and Italy, curiously enough) where share prices rose on average.

Next week still to be dominated by corporate results

The coming week will again see a vast range of companies publishing their results for the first quarter of 2016. A fair amount of macro news, the most important being US jobs and unemployment data, will also be announced. Quite a few energy companies, European banks and a few pharmaceutical companies will be publishing their operating results. As far as the energy companies are concerned, it will be interesting to see whether the positive trend, initiated by Total and BP, will be echoed by a number of smaller US companies (such as Apache Corporation, Occidental, Marathon, Devon and Noble), Spain’s Repsol and particularly Royal Dutch Shell. In terms of the banks, we’re looking forward to results from the likes of HSBC, BNP Paribas, UBS and Commerzbank, as well as the bank with the most beautiful name of all – Banca Monte dei Paschi di Siena. The pharmaceutical companies include Pfizer and Allergan (whose planned merger was called off last month), as well as Merck & Co. and Fresenius Medical Care. We also expect to see results from other noteworthy companies such as Siemens, Deutsche Telekom, BMW, Alcatel-Lucent, Infineon, Kraft Heinz, Kellogg, Anheuser-Busch InBev, Adidas and Motorola. On the macroeconomic front, we expect to see the final figures on sentiment among purchasing managers in both industry and services in April, although these are not likely to deviate significantly from the provisional data. New figures will also be published on March retail sales in France, Belgium, the Netherlands and the European Union as a whole. US and French car sales for April are also expected. Most other data will be coming out of the US, including construction spending in March, trends in labour productivity and labour costs in the first quarter of the year, and, to top it all off, monthly figures on employment and unemployment for April.


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