International considerations given greater weight by Federal Reserve

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Following a week when most of the talk was about the European Central Bank (ECB), last week most of the movement on the markets was caused by the US Federal Reserve (Fed). The stock markets found it difficult to decide which way they were going, however, particularly in Europe.

This week the main emphasis will again be on macro news. It is a short week, with many markets staying closed on Friday. The earnings season is over with the exception of the last few companies Ben Steinebach Ben Steinebach Head of Investment Strategy

On Wednesday the Fed’s policymaking committee FOMC decided to leave the bandwidth for the Fed Funds Rate where it was, at 0.25%-0.5%. By and large, this was what the financial markets had expected. More importantly for the markets, the Fed added that not four, but only two more rate hikes will follow this year. Given the decent state of the US economy, with a pleasing growth rate and gradually improving inflation, the logical path would have been to raise interest rates more over the year. Presumably, however, the Fed is giving more weight to the risks in the international context. With interest rates remaining so low over an extended period of time, the volume of dollar debt has risen sharply, particularly in many emerging countries. If the dollar becomes more expensive (owing to higher interest rates), those debts will potentially become a greater burden on those countries’ economies. This in turn might depress exports from the United States. The dollar fell in the wake of the decision not to raise interest rates and to carry through fewer rate hikes during the rest of the year. As so often happens, this coincided with rising oil prices: the price of a barrel of North Sea Brent climbed above the USD 40 mark by some margin. We actually do not expect any further US rate hikes this year, and have modified our forecast for the euro-to-dollar year-end exchange rate to USD 1.15 (up from USD 1.05). In the US the Fed’s decision met with a favourable response from the stock markets. The 10-year yields there fell marginally, and slightly more in Europe, although the stock markets here had difficulty deciding which way to move. On Thursday the markets in Germany, the Netherlands and the United Kingdom closed slightly higher than they had the Friday before, while most other markets lost some ground. Conversely, the markets in the US all won between 0.5% and 1.5%.

Gradual recovery of macroeconomic indicators

The concerns about recession in the United States and Europe that emerged on several occasions earlier this year have been eased. Overall, the economic data published last week were encouraging, particularly in industry. In January, Europe’s industrial output outperformed expectations by rising 2.1% relative to December. In the United States various regional confidence indicators, following several months of poor results, showed improvements in February and March. Japan also reported improvements in the industrial sector: machine orders were up 15% in January instead of the increase of barely 2% that had been forecast. The concerns about a recession that plagued the first two months of the year, particularly in industry, now appear to be unfounded. This is good news for the stock markets. In the United States, the markets were also buoyed by the encouraging results reported by companies at the tail end of the earnings season, including Fedex and Adobe. The higher prices that users and trial users have to pay for renewing or purchasing subscriptions are boosting Adobe’s earnings: the profit reported for Q4 of last year exceeded expectations, and the company recorded a 25% increase in revenue relative to the year before.

The effect of the ECB’s announcement of new stimulus measures on 10 March still lingered on the financial markets. This was reflected primarily on Europe’s bond markets, with interest rates in Southern Europe in particular falling sharply. The ECB’s decision to expand the scope of its bond-buying programme to cover corporate bonds generated additional activity in that market segment. Brewer AB InBev had hoped to raise EUR 6-9 billion from a bond issue. In the event subscription exceeded EUR 30 billion, and the loan raised EUR 13.25 billion with ease. In the Netherlands the AEX closed at just above 444 points on Thursday, more than 0.5% higher than the Friday before. By Friday morning the index had climbed marginally to almost 445 points.

Looking ahead to a short but interesting week of macro news

This week the main emphasis will again be on macro news. It is a short week, with many markets staying closed on Friday. The earnings season is over with the exception of the last few companies. Those companies were difficult to find, and I eventually found cruise operator Carnival, home improvement retailer Kingfisher and sportswear manufacturer Nike. Despite the absence of any important meetings of central banks, the week will be an interesting one for macro news. Further confirmation might emerge of the status of the industrial sector worldwide, with the publication of the March sentiment among that sector’s purchasing managers. The principal measure of business confidence in Europe’s largest economy, Germany’s Ifo Index, is also scheduled to be published, as will the ZEW Index, showing how investors see investment opportunities in the German and European economies. Data will be released about both existing and new residential sales in February in the United States, where February’s durable goods orders are also certain to generate interest. New data are expected about consumer spending in the Netherlands in January and about consumer confidence in Germany, France and the European Union as a whole in March. Various countries are set to announce new information about their current inflation. Lastly, data will be released about retail sales developments in January in the United Kingdom and Italy.

This Friday is Good Friday, and no Investment News will be published. The editors wish all our readers a Happy Easter. The next issue of Investment News will appear on 1 April.


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