Equity markets across the world were pretty flat in the past week, despite a deluge of news including corporate results, macroeconomic data and central banks announcing monetary policy changes.
In spite of the robust figures this time around, the underlying story is not encouraging.
Ben Steinebach Head of Investment Strategy
Japan’s stock market experienced the biggest falls in the week, but as the yen was the strongest currency, the decline wasn’t so bad in euro terms. China recorded slight net gains, while the US was virtually unchanged.
Remarkably, the Dow Jones recorded overall losses of only 1.4% after closing lower no less than seven days in a row. Europe suffered the steepest falls, with the Southern European countries hit hardest. The Stoxx 600 lost 0.8% and the AEX 0.9%.
The European slide came in the wake of the stress tests conducted at the continent’s banks. Granted, virtually all of them passed the test, but there was no denying the underlying issues. Banks are no longer capable of paying cash to their shareholders in the shape of dividends and/or share buyback programmes. Also, Europe’s stress tests were less rigorous than those in the US and fewer banks were actually tested – in fact, the weaker banks of Greece, Cyprus, Portugal and some in Italy weren’t even taken into account. All this doesn’t change the fact that, at the end of the day, the European banking system is simply too large and needs to shrink further.
Solid results season drawing to an end
This week was still awash with corporate figures, but the second-quarter season is nearing its conclusion. In the United States over 85% of S&P500 companies have now reported, while Europe has just scraped past 75%. Corporate results were solid, albeit that forecasts had been downgraded in the run-up.
The US, as always, did better than Europe, with profits improving in 78% of corporate reports and sales in 57%. The same numbers worked out at 60% and 51% for their European counterparts. Industries that did well included IT and healthcare, while telecoms and utilities fell behind. In the energy sector, oil majors such as Shell and BP also disappointed.
In spite of the robust figures this time around, the underlying story is not encouraging, with corporate earnings and sales showing year-on-year falls as they have in the past quarters. The market consensus expects growth to remain flat in the next couple of months, after which US companies should return to growth in the fourth quarter, while Europe is expected to turn the corner at the beginning of 2017.
A mixed week for macroeconomic data
Manufacturer confidence kicked off the macroeconomic week, with multiple numbers painting a somewhat mixed picture in China while confidence was down in Europe – if marginally better than had been expected. The UK, however, disappointed and saw manufacturers much less sanguine than had been anticipated. Similarly, US manufacturers reported a sharp decline in confidence, though current levels still point to economic growth.
Confidence figures for the services sector were also released in the week. These were more or less in line with expectations in Europe, but again disappointed in the US by staging a more rapid fall. At current readings of 55.5, this indicator is still very robust.
Aside from the confidence indicators, the first week of the month always sees the release of employment data in the United States. These will be published on Friday afternoon and have been pretty volatile in the past couple of months. July is expected to have added 180,000 jobs. The national employment report released on Wednesday by pay check processor ADP revealed a rise of 179,000 jobs, which was slightly better than had been expected.
Fireworks in the UK; Japan keeps its powder dry
Lastly, two major central banks had news for the markets: the Bank of Japan (BoJ) disappointed by not announcing any fresh stimulus measures. The yen appreciated as a result. The BoJ said it would review its policies to ascertain whether the desired effects are being achieved, and expects to publish its findings on 21 September – the same day, incidentally, on which the US Federal Reserve will communicate whether or not it will change its monetary policies.
The central bank surprise of the week was the Bank of England (BoE), which cut interest rates to 0.25% from 0.5% and unexpectedly expanded its asset purchase programme by GBP 60 billion to GBP 435 billion. It also said it might cut rates even further if necessary, while slashing its 2017 growth expectations to 0.8% from 2.3%. The news boosted the UK equity markets but pushed down sterling.
It wasn’t just currencies that had a volatile week: oil prices also recorded major swings. Oil inventories in the US grew but crude oil prices remained at over USD 40 a barrel.
No investment policy changes
Our investment policy was unchanged in the week: we have kept in place our neutral weighting of equities, our underweighting of bonds and our overweight stances on real estate and commodities.
This blog has been written by Ralph Wessels, standing in for Ben Steinebach.