Mario Draghi reluctant to scale back ECB stimulus

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Last Thursday’s meeting of the European Central Bank (ECB) left monetary policy unchanged, and at his press conference afterwards ECB President Draghi was even heard to hint at more stimulus measures – keeping the financial markets in very good cheer indeed.

The past week’s macroeconomic releases were generally encouraging. Ben Steinebach Ben Steinebach Head of Investment Strategy

Europe’s central bank intends to wait until the eurozone sees inflation touch its target 2% and remain there for some time. It isn’t quite there yet, but a recent uptick in oil prices might help give it a push. In fact, the inflationary effect of rising oil prices might even gather momentum given that year-earlier months saw the reverse trend as oil prices hit record lows – making for higher year-on-year comparisons from those lows. We expect the ECB to use its December meeting to announce a continuation of its current policies to September or December 2017 (instead of March 2017 as announced earlier). Meanwhile, terms and conditions governing asset purchases are likely to be relaxed to enable the ECB to buy more paper than it’s doing at present. Indeed, a rather lengthier period of monetary easing would seem called for, as the ECB’s recent bank lending survey found that conditions for corporate loans had not eased in the third quarter, which is a first since it launched its asset purchase programme. And the fourth quarter would appear to be seeing even tighter conditions, a sign that banks are finding it harder to lend, partly because of steeper capital adequacy requirements.

Favourable macroeconomic news in the week that was

The past week’s macroeconomic releases were generally encouraging, and the previous week’s disappointing foreign trade numbers for China were more than offset by new data. China’s economic growth worked out at 6.7% in the third quarter compared with the year-earlier period and matched its second-quarter showing. Some analysts drew attention to the sheer coincidence of these perhaps too sanguine figures, but financial data provider Bloomberg, which had drawn up its own forecasts, arrived at a comparable growth figure. In addition, China recorded solid retail sales figures for September, supportive of a country in transition to a more consumer-oriented economy. Moreover, China reported a September increase in industrial production of over 6% on the year-earlier figure. Meanwhile, Europe and the United States returned largely favourable figures for industrial output, while the latter had positive housing market data to report, even if its Empire State Manufacturing Index – providing an idea of October industrial activity in the New York area – disappointed slightly. American inflation figures for September were encouraging, staging a 1.5% rise on the previous year, 2.2% ex food and energy – a big contrast with the 0.8% measured in the eurozone. That said, this region did enjoy positive foreign trade figures and solid consumer confidence numbers in the Netherlands.

Results season paints mixed picture

The third-quarter results season got underway this week, with US banks reporting solid figures while the IT industry produced a mixed bag of results. Bank of America’s earnings per share beat expectations by nearly 25%, with net income of USD 4.96 billion (up 7.3%) and revenues of USD 21.6 billion (3.1%). Goldman Sachs also saw EPS come in around one-quarter higher than expected on the back of hefty 46% revenue growth compared with the year-earlier figure: USD 2.09 billion. In the IT sector, a disconnect is opening up between older and the latest technology, even within companies themselves. Netflix reported earnings per share twice as high as predicted, and was rewarded by the markets with an 18% price gain despite its cautious guidance on the fourth quarter. IBM also reported solid results, but its rewards were slim (3.1%). Verizon and Ebay disappointed, whereas Microsoft did very well. And it wasn’t so much its more traditional Windows and telephony (Nokia) operations that did the trick: its rapidly growing cloud activities came up trumps. In the teeth of fierce competition from the likes of Google and Amazon, Microsoft secured company-wide earnings per share of nearly 12% in excess of expectations, with revenue nudging 5%. SAP also saw profits and revenue beat forecasts, thanks in the main to rapidly growing cloud services. Net profits at the Dutch high-tech player ASML, by contrast, narrowly failed to meet expectations in the third quarter, at EUR 1.81 billion. Its sales were a little higher than projected, however, keeping margins at a still very respectable 46% – only very slightly below the 46.9% analysts had been looking for. Share prices in the US equity markets added around 0.5% in the week, compared with 1-1.5% for their European counterparts (with outliers of over 3% at Southern European stock markets). The Dutch AEX was in the middle of the pack, gaining 1.25% (to 456.06), and by Friday morning the index was up another 0.3%, at 457.5.

Lots of company and macroeconomic news in the week ahead

The week ahead should be a meaty one for market watchers, in terms of both corporate results and macroeconomic news. Purchasing managers’ sentiment in all major countries is likely to hog the financial pages, while in the Netherlands we look forward to a slew of corporate numbers. 

There’ll be too much news to list, but in macroeconomic terms it’s business confidence that should take centre stage. In addition to PMIs for both manufacturing and services, and including provisional data for October, the main focus will likely be on Germany’s Ifo index. But this leading European indicator will not have the stage to itself: also due to report on business confidence are France, the Netherlands and the European Union as a whole. Meanwhile, a number of countries will release data on consumer confidence: the European Union, France, Italy and Germany, in addition to the United States, where both the Conference Board and the University of Michigan will post their own indicators. Meanwhile, the United States and the United Kingdom are slated to publish their third-quarter economic growth numbers, the latter’s being the first quarterly figures since its Brexit vote – it’ll be interesting to see the impact of sterling’s pounding and changing confidence. In the Dutch corporate arena, Royal Dutch Shell, Philips, Heineken, TNT-Express, Randstad, KPN, ASMI and BESI will claim the limelight, with countless companies outside the Netherlands also due to report. A selection: Apple, Anheuser Busch, Dow Chemical, Exxon Mobil, BASF, Syngenta, Bayer, Deutsche Bank, MasterCard and VISA. Healthcare/pharmaceutical company results will also come thick and fast: Novartis, Glaxo SmithKline, Bristol Meyer Squib, Eli Lilly, Merck&Co, Sanofi and Biogen. Other names vying for attention will include Coca Cola, Caterpillar, Boeing and car manufacturers Renault and Peugeot.

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