Markets jittery over interest rates and sterling

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Interest Rates

In the past week, the financial markets were spooked by rumours that the European Central Bank (ECB) was about to throttle back its stimulus programme, while the British pound took a massive hit.

We would be surprised if rumours that the ECB is looking to gradually wind down its asset purchase programme were true. Ben Steinebach Ben Steinebach Head of Investment Strategy

This severe pressure on sterling initially followed the UK Prime Minister Theresa May’s announcement at the Conservative party conference that the United Kingdom would trigger Article 50 and start Brexit by March 2017 at the latest. On Thursday sterling lost over 6% in the space of two minutes in Asian overnight trading, but this is likely to have been the result of a faulty algorithm or a fat finger error by a trader, and the currency quickly regained some of the ground lost. 

A bigger shock in the week was a rumour that the ECB is looking to gradually wind down its asset purchase programme in the year ahead. We would be surprised if this were true, as eurozone inflation is still widely off the ECB’s target of around 2%, although it did inch up from 0.2% to 0.4% in September. This rumour may well have been leaked to very gently prepare the financial markets, but we expect the programme in 2017 to first be extended a bit longer and its terms and conditions eased to include more types of bonds. That said, the rumour did help to push up bond yields and strengthen the euro relative to the US dollar. 

The past week’s macroeconomic news was generally favourable, with sentiment improving among purchasing managers in European manufacturing. Admittedly, the services industry recorded a slight deterioration – albeit from higher levels – but it typically follows the rather more cyclical industrial sector. The United States saw capital goods orders up for a third consecutive month, pointing to a revival in capital spending by the corporate sector after a long period of being squeezed, particularly in the energy sector. Oil prices moving up to USD 52.50 per Brent barrel also helped, but US equity markets still lost some ground in the week. By contrast, most of their European counterparts closed Thursday slightly ahead of the previous Friday’s showings.

Delta Lloyd rejects NN bid

In the European equity markets, Deutsche Bank’s vicissitudes continued to take centre stage, while the Dutch market also saw a bid by NN for Delta Lloyd. Delta Lloyd’s very diplomatic response on Thursday was that it would seriously consider any offer that contributes to the creation of shareholder value but that it feels NN’s cash offer of EUR 5.30 does not meet this requirement – which probably means no more than that it considers the offer by Nationale Nederlanden’s parent company too low. The Amsterdam market agreed and Delta Lloyd’s share price pushed upwards of EUR 5.30 following the bid announcement. A price ranging between EUR 6.00 and EUR 6.20 would appear more appropriate. 

Last Friday, a rumour suggested that the US Department of Justice’s claim of USD 14 billion against Deutsche Bank had been slashed to around USD 5 billion. This turned out to be wrong and fear of a DB bankruptcy again reared its head. Leading German entrepreneurs are reportedly willing to provide immediate cash relief to the beleaguered bank, as any such demise would be disastrous for the country’s economy. Deutsche Bank now seems intent on selling its asset management arm to overcome its troubles. 

In the Netherlands, PostNL announced it is buying two online marketing agencies – Yourzine and Searchresult – and forging them into a single company with its own marketing subsidiary in an attempt to tap into fresh sources of income as the postal market continues to contract. The AEX ended Thursday at 454.82, up 0.6% on the previous Friday’s close. The index started Friday morning a smidgeon lower at just above 454.

Results season about to get underway

We’re a week into the final quarter of 2016 and, as tradition dictates, the second week will see US aluminium producer Alcoa kick off with its third-quarter results. Meanwhile, the markets are eagerly awaiting Sunday evening’s second presidential debate between Hillary Clinton and Donald Trump. Both candidates are likely to engage in character attacks and sling even more mud than in the first debate, and not much substance on policy plans is expected. Meanwhile, the IMF and the World Bank will have their annual meeting in Washington over the weekend. In its Global Financial Stability Report in the run-up to the meetings, the IMF urged the international banking industry to reform in order to keep profitability on an even keel. 

The results season marks its traditional start on Tuesday with the release of Alcoa’s results, and with US banks Wells Fargo, Citigroup and JP Morgan following later in the week. In the Netherlands, Unilever will be the first to post its third-quarter figures. On the macroeconomic front, September inflation figures will be released by quite a few countries, e.g. Germany, France, Italy and China on consumer prices and the United States and China on producer prices. In addition, Germany and China will publish September numbers for international trade, while new August industrial output figures for Italy and the European Union as a whole will hit the market. Investor interest will also focus on the minutes of the September Federal Reserve meeting, which might suggest the timing of the next rate increase. 

The Bank of England (BoE) is due to hold its monthly monetary policy meeting on Thursday and next Friday should see the University of Michigan publish provisional figures on American consumer confidence in October. But first we’re eagerly awaiting the latest data on the US labour market in September, which will be presented this afternoon. You’ll know by the time you read this whether these have met expectations of 165,000 new jobs.

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