In the week just past, the equity markets have staged a recovery and post-Brexit losses have been recouped, particularly in Europe. And yet, low yields still point to some safe-haven flight and risk aversion.
Both merger & acquisitions news and the first set of second quarter 2016 corporate releases buoyed up market sentiment.
Ben Steinebach Head of Investment Strategy
The more upbeat mood in the global equity markets reflected a mix of factors including macroeconomic and (geo)political, as well as the start of the results season. In the macroeconomic arena, steeply higher US employment figures, announced last Friday, still reverberated at the start of this week, as the 287,000 rise in jobs was a hefty c.100,000 more than had been expected. And today (Friday), China also reported better-than-expected data, with second-quarter economic growth coming in 6.7% up on the year-earlier figure – the same increase as in the first quarter and slightly ahead of expectations. Clearly, then, the Chinese economy isn’t displaying any signs of a major slowdown just yet, with June industrial production and retail sales also showing stronger advances than had been forecast. Investment growth, by contrast, did lag expectations a smidgeon, but this figure is still very high – 9% compared with June 2015 – while the Chinese authorities would like to see growth turn more consumer-driven and less investment-led.
Positive take on political developments
Much more quickly than assumed only two weeks ago, the United Kingdom has a new government in place, with Brexit negotiations thought to get under way faster as a result. The resounding upper house election victory for Prime Minister Shinzo Abe’s LDP party in Japan also gave a boost to financial markets. Meanwhile, in the UK Theresa May was elected leader of the Conservative Party and appointed the country’s Prime Minister, propelled in by a number of unfortunate remarks by her last remaining rival Andrea Leadsom, who then pulled out of the race for the Tory leadership, making it pointless to wait until September. The new government’s key players in Brexit negotiations include Boris Johnson, a Leave campaign figurehead, as Foreign Secretary, although his ministry has been stripped down somewhat with the creation of a brand new government department with responsibility for Brexit, headed up by the highly experienced David Davis. Another key player is Liam Fox, the new Secretary of State for International Trade. As the new Chancellor, Philip Hammond will have a key role to play in keeping UK public finances on an even keel, while Amber Rudd is taking over the Home Office that is in charge of immigration, the referendum’s main issue. The sheer speed with which Prime Minister May was appointed and announced her new cabinet has greatly contributed to improved sentiment in the global equity markets. Another boost was the sweeping victory that Shinzo Abe’s LDP secured in elections to Japan’s upper house. Together with a handful of like-minded small parties, this has given the LDP the two-thirds parliamentary supermajority it needs to revise the constitution as well as take new measures to kick-start the ailing Japanese economy.
Central banks and additional stimulus
The Bank of Japan is now more likely to step in and launch additional stimulus, possibly in the shape of helicopter money, which sees a central bank giving money directly to the population via the government. In the United Kingdom, the Bank of England unexpectedly left its base rate unchanged, but a rate cut and other monetary stimulus are bound to be implemented in August, once the economic impact of Brexit materialises. The eurozone should also see additional support from the European Central Bank (ECB) while we – and others – do not expect to see any further US rate hikes, which should make for a mellow mood in the financial markets.
Corporate news lifts equity markets
Both merger & acquisitions news and the first set of second quarter 2016 corporate releases buoyed up market sentiment. The past week saw Bayer up its bid for Monsanto to USD 125 per share from USD 122. Monsanto is holding out for more – USD 140 per share – but its shareholders are likely to urge the company to take what’s on the table. That said, there are some concerns about how Bayer will finance this bid (fully in cash) while a range of regulators still have to give the go-ahead. In the Netherlands, there are fears over the proposed acquisition of Tata Steel by Thyssen Krupp – especially on the part of Tata Steel corporate support departments, as this could lead to their positions being shifted to Germany.
The first set of second-quarter results was generally positive. Alcoa, which traditionally kicks off the reporting season, posted earnings per share at US 0.15 as against the USD 0.09 that had been expected, with revenues also beating expectations and further improvements forecast for the second half of 2016. Among US investment banks, JP Morgan released robust and better-than-expected results, but Blackrock’s disappointed as they’d been hit by the massive turbulence in the financial markets. All of the leading equity markets across the world notched up solid gains, even if these were rather stronger in Europe and Asia than in the United States. Bond market returns inched ahead but still languished well below pre-referendum levels. On Thursday, the AEX closed 3.3% up on the previous Friday at 448.19 points, keeping its upturn slightly below the European average of around 4.5%. By Friday morning, the Dutch index had moved a little lower, to just over 447.
Results season gathers momentum
The week ahead should see a great many companies publish their interim results, while we’re also expecting some key macroeconomic data. The bulk of the releases will be in the States and many of these in financial services (Morgan Stanley, Goldman Sachs, Bank of America, Visa and Moody's). Some pharmaceuticals are on the roster, i.e. Johnson & Johnson and Europe’s Novartis, while General Electric is an interesting player, as it is generally seen as a reliable reflection of the state of the US economy. Energy services providers Halliburton and Schlumberger, as well as technology players Intel, Microsoft, EMC and Yahoo likewise feature on this formidably long list. European names to look forward to include SAP, Syngenta and Daimler, while Unilever, ASML and property companies Wereldhave and Unibail Rodamco will be leading the pack in the Netherlands.
When it comes to macroeconomic data, the focus will be on ECB numbers for lending by European banks and on July PMIs in many countries across the world. Taken together with European consumer confidence figures for July, these should give a first inkling of the Brexit effects on continental Europe.