Worldwide, the financial market situation has deteriorated over the past week. The main causes were weaker macro data from the US and Europe and uncertainty concerning the Fed's policy.
De komende week komt het beleidsbepalende comité van de Federal Reserve (het FOMC) bijeen en dat zal woensdag een beslissing nemen over de rente (de fed funds rate).
Ben Steinebach Head of Investment Strategy
The trouble started last Friday, when President Rosengren of the Boston Federal Reserve stated in a speech that current low US interest rates are contributing to overheating of the economy. Coming from a dovish central banker like Rosengren, such a statement is almost guaranteed to prelude an interest hike. At least, that is how financial markets read it. The considerably more temperate speeches later that week by Fed board members Tarullo and Brainard could not erase that first impression, and stock markets fell accordingly. One could argue that it's a tad excessive to blame the market gloom entirely on the words of a handful of Fed people, but this was not the only factor at play. The European Central Bank (ECB) had disappointed market expectations on Thursday 8 September by failing to announce new incentive measures or even extend the existing ones. Doubt also arose regarding the strength of the economy, in Europe and the United States in particular.
A Federal Open Market Committee (FOMC) meeting is scheduled for next week, leading up to a decision about the fed funds rate on Wednesday. Notwithstanding Rosengren's words we do not expect interest rates to be hiked. We believe the Fed is awaiting some more positive economic news before raising rates. Because of the prospects of economic indicators picking up in the third and fourth quarter of this year, a hike in December is the most plausible scenario. For the eurozone, the situation is reversed: the economy will presumably weaken as we progress into the second half of the year. Consequently, we expect the ECB to add more stimulus to its policy in December.
Aversion and controversy around Bayer’s acquisition of Monsanto
The unrest that flared up again on global equity markets this week was not triggered by company news, which was rather lean. Bayer's acquisition of Monsanto was the hot topic of the week. During this slow season for news, Apple launched its new iPhone 7. The success of the smartphone's newest edition is to be achieved by its increased speed, a new camera system and a longer-lasting battery. Apple's share price soared on the anticipation, with a 3.4% gain on Thursday. Oracle was one among a handful of companies still presenting their results over the second quarter. Oracle's positively surprising tick-up in sales to USD 8.7 billion (versus expected 8.6 billion) could not balance out the disappointing profits per share (USD 0.55 rather than the expected USD 0.58) and, as a result, the share dropped by 3.9%. Furthermore, although not exactly “news” any more, Bayer acquiring Monsanto led to a great deal of discussion this week, and understandably so. Bayer is willing to pay USD 58 billion (USD 128 per share) for the US seed improving giant. The acquisition provoked strong feelings in both agricultural and environmentalist circles. Farmers are dreading a monopoly (and as a result, negative consequences to their own businesses) while environmentalists remain sharply opposed to Monsanto's use of genetic engineering and herbicides such as Roundup. Perhaps the US authorities will have some objections of their own, regarding fair competition. In any case, if for whatever reason the transaction does not go ahead, Bayer will still have to cough up USD 2 billion in compensation. Remarkably, US equity markets managed to close the week higher than they started. The same cannot be said for European markets, which lost between 1.5% and 3.5% on average. The AEX was in the middle bracket, suffering a loss of over 2% (to 443,2 on Thursday). On Friday morning, the index hovered a little lower even, around the 440 mark.
What is Janet Yellen doing next Wednesday?
Interestingly, next week we will see several more US companies post their results. In the macro arena, the main focus points are European consumer confidence data and the Fed's interest rate meeting. The businesses still due to present their results make for a varied bunch: an interior decorator (Kingfisher), a cruise line (Carnival), a software company (Adobe Systems) and a parcel delivery service (FedEx). On macro level it will be a quiet week as well, but we are looking forward to a number of intriguing events. Although the Federal Reserve's meeting is a major topic, we do not expect it to lead to any policy changes. Equally if not more interesting are the new consumer confidence figures to be published in the European Union and in the Netherlands and Belgium. That data can spark new insight into the consumer spending prospects for this region. We are also looking forward to the release of US housing market data, including the NAHB's housing market index, new housing starts and existing home sales over August. At the end of the week, moreover, the first purchasing manager sentiment estimates will be published in a large number of countries. Data will also be released on the US leading indicator in August, as well as a revised estimate of second-quarter economic growth in the Netherlands and Italy. Like the US Fed, the Bank of Japan is holding a policy meeting next week. And although the ECB is scheduling a meeting of its own, the agenda will not feature monetary policy.