Markets remain volatile

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The stock markets started last week Monday with fair performances. However, the mood shifted temporarily on Tuesday following the release of disappointing macroeconomic reports. On Wednesday night relief came from the United States, however, where the markets made a strong recovery. This positive sentiment was adopted by investors in Europe. The markets were given a further uplift by encouraging economic data and hopes that the European Central Bank (ECB) will introduce further stimulus measures in March.

The last few companies are scheduled to publish their earnings this week. This week will also offer some interesting macroeconomic news for the markets, with the focus on the United States. Ben Steinebach Ben Steinebach Head of Investment Strategy

Last week Monday the stock markets managed to build on the previous week’s strong upsurge. On Tuesday, however, the mood turned slightly sour again, owing in part to the disappointing macroeconomic data from Europe and the US. February’s PMI for the eurozone was 52.7, against 53.6 in January. The PMI is an index that gives an idea of purchasing managers’ confidence in the economy at that moment, where a PMI score of more than 50 indicates economic growth and a score of less than 50 reflects economic contraction. The most recent drop was caused primarily by decreased activity in the industrial sector. The repercussions of the euro’s slight climb were also reflected in the lower export data. The corresponding figures in the US were also disappointing, with the PMI down from 52.4 to 51.0 last month. This indicates that Europe and the US are still experiencing growth, but at a slower rate, meaning that they are going through a somewhat weaker period. This sentiment carried over to the stock markets, and over the course of three days the AEX plunged from above 420 to back below 405. On Wednesday night, however, the Wall Street markets made a remarkable recovery. Having initially opened significantly lower, they turned this around before eventually closing on a positive note. On Thursday the stock markets received a further uplift from the durable goods orders in the US, which experienced an unexpected surge. Aided by the disappointing inflation reports from the eurozone, this alleviated worries about the possibility of recession in the US. The ECB has announced its concern about the falling inflation, and an additional round of stimulus measures in March now seems a foregone conclusion. The most important questions remaining are precisely what action will the ECB take, and how aggressively will that action be? On the whole, investors respond well to additional stimulus, and on Friday the further increase in oil prices offered another boost.

Oil prices continue to recover

It is commonly accepted that movements on the stock markets and oil prices have long been linked. Where in 2014 most of the stock indexes managed to ignore the falling prices, this ended last year. Reports from the energy sector became more and more worrying and played a large role in the deteriorating sentiment. With hopes of an agreement about a production freeze increasing, however, not only the price of oil is recovering, the prices of the much-plagued oil-related companies are too.
Oil prices first began to fall in the summer of 2014. At the time, a barrel of Brent sold for around USD 115. Early this year, the prices bottomed out (at least for now) at roughly USD 27: an overall drop of almost 75%. As a result, the MSCI World Energy Sector has lost almost half its value since the summer of 2014, and is now at levels approximating those of early 2009. Almost every company in this sector has been hit. Profits and turnover have nosedived, and several companies have found themselves in serious difficulties. In 2014 most of the stock indexes were buoyed by solid performances in other sectors, such as pharma and technology. In 2015, however, the general downturn on the overall commodities market carried over to other commodities-related companies. Eventually this affected the general sentiment and most indexes across a broad spectrum lost ground. Another factor that affected the stock markets was that not only the companies in this sector were affected, but also countries that depend on income from oil. These countries can use ‘Sovereign Wealth Funds’ to sell stock and finance their budgets; generally the numbers involved are considerable. However, the sentiment appears to have improved over the past month, and if the global economy continues to grow, and the growth rate of oil production drops or stabilises, it seems only a matter of time before a new balance is found at a higher price level. This would be good news. If oil prices continue to recover, this will offer the energy sector some breathing room, which in turn will improve the overall sentiment: bankruptcies and dividend cuts are generally not well received by investors. However, no agreement has yet been reached about a production freeze, and supplies remain abundant. As such, significant volatility is still a possibility.

All eyes on the United States

The last few companies are scheduled to publish their earnings this week. This week will also offer some interesting macroeconomic news for the markets, with the focus on the United States.
This Monday is the first opportunity for investors to respond to the outcome of the G20, which was concerned primarily with the current economic situation in China. With a new month beginning on Tuesday, a flood of macroeconomic reports are expected, which might give the financial markets some direction. The first day of the month is when every country publishes its latest PMI Manufacturing Index. On Wednesday all eyes will be on the findings of February’s ADP employment report in the United States, which shows by how much employment has increased in the private sector in the US. US consumers are very important for economic growth in the world’s largest economy. On Thursday the market will shift its focus to the PMI Services Index. Just as Monday’s PMI Manufacturing Index shows the current situation of the industrial sector, the PMI Services Index shows the economic developments in the service sectors. Both these indicators can be interpreted in the same manner. The busy macroeconomic week closes on Friday with details about the labour market in the US, when the monthly jobs report and unemployment in the US are announced. These figures are seen as the final indicators for the important Fed meeting on 15 and 16 March 2016.

Where this week’s macroeconomic focus is on the US, only Europe still has any interesting companies that have yet to publish their annual earnings. With the exception of a few minor players, the earnings season in the US is visibly coming to an end. In Europe, however, some large companies such as Volkswagen, Barclays, Glencore, Adidas, Continental and WPP are scheduled to announce their earnings. In the Netherlands Galapagos, PostNL, Gemalto and Ahold will present their annual earnings. With the last of these companies, it will be particularly interesting to see how the merger with Belgian chain Delhaize is progressing.

Michael Nabarro

In the absence of Ben Steinebach
Head of Investment Strategy


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