Last week investors managed to shrug off the pessimism that the Federal Reserve had triggered the week before. Most stock markets climbed while bond rates fell marginally.
By and large, last week’s macro news was encouraging. Most of it came from Germany and the United States.
Ben Steinebach Head of Investment Strategy
Little news was published last week to determine events on the markets. In the background concerns linger that the UK referendum on 23 June will lead to a Brexit, although the polls indicate that slightly more of the country’s population intend to vote in favour of permanent EU membership. Brussels provided some good news, when the Eurogroup’s finance ministers, under Dutchman Jeroen Dijsselbloem, reached an agreement with Greece about a new tranche of relief funds. Between now and the end of the year EUR 10.3 billion will be disbursed to Greece, some of which may be used for the country’s expenditure (salaries and pensions). Previous disbursements could be used only for interest and repayments on existing debts. Germany has been given a commitment that debt relief will not be on the table until 2018. This was a bitter pill for the IMF, which would have preferred to arrange debt relief (or even waive the Greek debt) much sooner.
By and large, last week’s macro news was encouraging. Most of it came from Germany and the United States. In Germany consumer confidence improved slightly, while business confidence (the Ifo Index) was also up. The purchasing managers’ sentiment also improved, unlike the index for the eurozone as a whole, which was down marginally. Investors’ expectations for the German economy (measured in the ZEW Index) fell slightly, yet on balance that country’s news was positive. In the United States some encouraging data about the housing market in April was released, and orders for durables in the same month greatly outperformed expectations by surging 3.4%, though the chief contributor was a strong rise in the orders for transportation equipment (aircraft). The purchasing managers’ index in the United States matched the sentiment in the eurozone and deteriorated slightly. The improving macroeconomic situation reflects the comments of many of the directors of the Federal Reserve (Fed) that the Fed Funds Rate should be raised. The Fed’s purpose with those comments is to influence the market’s expectations, and this tactic appears to be succeeding. Where at the start of the year the prospect of higher interest rates triggered a great deal of turbulence on the financial markets, they now seem better prepared for a rate hike. Fed Chair Janet Yellen’s speech at Harvard on Friday night might help clarify the situation.
NN launches stock buyback
With the earnings season virtually over, very little news is around to set the stock markets alight. The few reports that made the news presumably had little impact on stock prices. At its shareholders’ meeting Royal Dutch Shell was faced with a motion by a group of activist shareholders asking the company to accelerate its efforts to transition fully to non-fossil fuel energy sources. However, the motion only won 3% of the votes, and for the present the company is free to continue to invest in oil and gas alongside wind energy. ABInbev’s plans to buy SAB-Miller were given the go-ahead from the European Commission last week. The merger of the world’s two largest brewers will produce a megacorporation, though SAB-Miller will be obliged to spin off some of its European companies. It has already sold Grolsch in the Netherlands and Peroni in Italy to Japanese buyer Asahi, and plans to sell Czech company Pilsner Urquell are at an advanced stage. Bayer gave further shape to its attempt to take over Monsanto last week by issuing a EUR 55 billion bid, representing a premium of 37% of the closing price on 9 May. Although Monsanto has announced that it will take some time to consider the offer, investors have already questioned the feasibility of financing the takeover. They have also expressed concerns about a loss of image owing to the genetic modification that Monsanto uses and various harmful pesticides. Bayer’s stock has fallen significantly in the face of these concerns. Cattle feed company ForFarmers kicked off its listing on the Amsterdam exchange brightly last week, immediately climbing 7% to EUR 6.95. NN Group, formerly Nationale Nederlanden, announced a programme to buy back stock. Over the course of a year, starting 1 June, the company will spend up to EUR 500 million to buy back shares in its capital.
The sentiment on the markets last week was upbeat. In the United States the markets closed around 2% higher on average than the Friday before, while their European counterparts managed around 3.5%. The AEX was caught up in the European euphoria and closed at 449.09 points on Thursday, up by 3.4%. On Friday morning stock prices fell marginally, depressing the market to just under 449.
Macro news dominates
The last trickle of corporate news will dry up almost entirely this week. This will be made up by a flood of exciting macroeconomic news, however. A few companies have yet to publish their Q1 earnings: Volkswagen, Broadcom and in the Netherlands Ahold. In macroeconomic news a long list of countries will announce their final data about the sentiment among purchasing managers in May, both for industry and for the services sector. These results are not expected to be very different from the provisional data presented last week. Also scheduled are reports of household consumption expenditure in France and the United States (for April), and retail sales in the European Union, Germany and Belgium (also for April). In the face of European Central Bank (ECB) policy, the publication of data about European consumer prices in May is anticipated with some eagerness: data will be released for Germany, France, Italy, Belgium and – most importantly – the eurozone as a whole. Producer prices in Italy, the Netherlands and Belgium will also be announced. On Thursday, moreover, the Executive Board of the ECB will meet to decide on the bank’s policy. The European Union’s Economic Sentiment Indicator (which combines consumer and business confidence) for May will also be published, as will business confidence in the Netherlands. In the United States new data will be released about consumer confidence in May, and the week will end with a bang with new data about jobs and unemployment in the US in May.