Turbulence continued to hold sway in the financial markets in the past week and risk aversion, much more than in the previous two weeks, saw investors scurry for cover. As a result, safe-haven bonds such as 10-year German bunds recorded yield declines of nearly 20 basis points to 0.33% on Thursday.
Prices in the global equity markets recorded continued major volatility
Ben Steinebach Head of Investment Strategy
In France and the Netherlands, ten-year yields fell back by a little over 10 basis points, whereas Spain and Italy recorded only limited downturns, below 5 basis points – a clear sign of a flight to quality. Risky equities were sold off and a move was made to havens considered to be very secure indeed. And this risk aversion was across the board, though I for one don’t believe that the fundamentals of the developed economies and the Chinese economy warrant the extent of the collapse.
Three causes feed into this risk aversion: China, oil prices and doubts about future bold action by the European Central Bank (ECB). To start off with the latter: in December 2015, the ECB gravely disappointed the financial markets by merely cutting deposit rates and extending its asset purchase programme to March 2017. The markets had been expecting the ECB to step up the programme from today’s EUR 60 billion a month to perhaps EUR 70 or 80 billion. So waiting for the outcome of last Thursday’s policy meeting was an even more nail-biting affair than usual. This time, however, President Draghi did not disappoint. He commented that the inflationary outlook had worsened in January and any increase in inflation was less likely in the wake of further oil price declines and a stronger euro than had been expected. His remarks suggest that the ECB might intensify its programme in March and cut interest rates even further. June is now also more likely to see similar measures.
Oil prices close to bottoming
In the past week, China reported economic growth in the fourth quarter of 2015 of 6.8% on year-earlier figures – a mere 0.1 percentage point below the third quarter and 0.1 percentage point less than had been expected. Not exactly figures pointing to a recession, I’d say. Fresh retail sales, investment and industrial production data were slightly less strong in December than in November, but these are still pretty robust growth numbers. And the data for the other regions more or less confirmed our expectations: manufacturing in the United States remains weak because of the strong US dollar but is offset by the services industry, while Eurozone indicators continue to point to a further upturn in economic growth.
Confidence indicators – such as the ZEW index and consumer confidence yardsticks in a number of countries – were the only ones to inch down in January, but this would appear to be the result of falling share prices rather than a sign of an imminent recession. Oil prices dipping to below USD 30 a barrel also contributed. Increasingly, low oil prices reflect excess supply rather than the declining demand that might flag slowing economic growth. In addition, speculative short positions have gone through the roof. In fact, we see oil prices recovering to USD 50 a barrel as the year progresses, thanks to increased global demand for oil, stalling supply (particularly in the US), closures of speculative positions and a less rapidly rising US dollar (a higher dollar typically curbs any price recovery).
Unilever takes over from Royal Dutch as Holland’s biggest listed company
Prices in the global equity markets recorded continued major volatility, but in the eurozone Mario Draghi sparked a reversal in sentiment on Thursday and even Holland’s AEX index gained a little ground on solid releases from the likes of Unilever and ASML. Ignoring gloomy macroeconomic sentiment, investors are eagerly awaiting more news in the results season, which kicked off in mid-January. To date, US banks and other financial services companies have released their fourth-quarter results, a mixed bag containing better-than-expected figures for JP Morgan and slightly disappointing ones for Wells Fargo. At USD 1.23, American Express notched up earnings per share a dime ahead of consensus expectations, but underlying trends were less favourable and the company had to make provisions. Oil services company Schlumberger also reported more robust earnings than had been foreseen, despite deeply disappointing operations in the United States, where a lot of oil capacity has been decommissioned. Schlumberger launched a USD 10 billion share buyback programme.
In the Netherlands, Royal Dutch/Shell saw its share price nosedive by 7% on Wednesday in response to a pre-market trading update indicating fourth-quarter earnings of USD 1.6 to 1.9 billion – caused by the fall in oil prices among other factors – compared with a year-earlier figure of USD 3.3 billion. The oil giant kept its dividend policy unchanged. Substantial results were posted by Unilever and ASML. The former notched up a 10% increase in sales to EUR 53.3 billion, primarily on the back of the strong dollar. Its share price added 3% and this, together with price falls at Royal Dutch/Shell, made Unilever the biggest company in the Amsterdam market. ASML likewise posted figures ahead of expectations, while also promising higher dividends and a share buyback programme worth EUR 1 billion. On Thursday, the AEX closed at 406.49, 0.7% up on the previous Friday, making it one of the exceptions in the international arena. This morning, Friday 22 January, the index had gained further ground on improving global sentiment, and was flirting with 415 points.
US results season really kicks off
Next week, a slew of more company releases than usual will hog the limelight, while it should also be an interesting week in macroeconomic terms. In fact, General Electric will post its results before US markets open – GE is often considered to give a solid reflection of the state of the US economy. Slated for release next week in the results season are Apple, Microsoft, Facebook, eBay, McDonalds, Biogen, Ford, Boeing, Halliburton, Chevron, VISA, Mastercard, Procter & Gamble and Johnson & Johnson. In Europe, we look forward to hearing about the performances of Siemens, Roche, Novartis and Hennes & Mauritz.
In the macroeconomic arena, key releases will include Germany’s IFO business confidence indicator as well as indicators gauging consumer confidence in France and Italy. Fresh EU-wide confidence figures for both consumers and business are also scheduled for release. The United States will see the publication of new house sales data, confidence indicators from both the Conference Board and the University of Michigan, durable goods orders and purchasing manager sentiment in the services sector. Lastly, inflation figures will be out for France and Japan.