No initial post-Brexit pessimism

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Developments on the financial markets last week were varied. Most of Europe’s stock exchanges recorded losses, except in Germany and France, and in the United States technology outperformed the other sectors.

The outcome of the European Banking Association’s stress test among 54 major European banks is expected to create some fireworks when it is announced on Friday night (29/7). Ben Steinebach Ben Steinebach Head of Investment Strategy

Bond prices rose slightly everywhere. The initial indications for business and consumer confidence on the Continent were barely down in July, and on the whole performed better than expected. This included the sentiment among purchasing managers, which deteriorated only slightly, and Germany’s consumer confidence. The Ifo Indicator, the leading indicator for German business confidence, also fell only marginally, and by much less than had been feared. The same occurred in the United States, though not in the United Kingdom, where both the purchasing managers’ sentiment and consumer confidence dropped significantly. The pattern that is starting to emerge shows the predicted differences between the UK and the European mainland, though in the latter area the situation is much better than foreseen. This should have triggered a more positive response on the stock markets. Although the losses were small, a degree of risk aversion shone through (although another factor was the new drop in oil prices, to below 45 dollar a barrel). This was also reflected on the bond markets: prices climbed slightly (including in southern Europe) and yields fell, most prominently in the United Kingdom. Obviously the developments there are linked to the rapidly deteriorating economic outlook.

Central banks: no help yet for the markets

Given the situation, unlike in July the British central bank will have little choice but to offer the economy a boost in August. The policymaking committee of the Bank of England will meet this week, and will presumably lower interest rates (currently at 0.5%) and expand the scope of its bond-buying programme. Other central banks did not do as the markets had expected, or hoped, that they would last week. For example the Bank of Japan, despite adding to an ETF buy-back programme, refrained from purchasing more bonds. The Federal Reserve presented a relatively optimistic picture of the US economy and labour market. This has led to increased expectations that the Fed Funds Rate could be raised this year, although last week was apparently still too early. Although we believe that the Fed will not yet act in September either, the probability of a rate hike has increased somewhat.

Technology companies stealing the show on the stock markets

A wide range of companies published their Q2 earnings last week. With a few exceptions, the results were very satisfying and in many cases better than expected – particularly for technology companies. The disappointments came mostly from oil companies. Royal Dutch Shell reported a staggering 72% drop in income relative to a year before. The company’s oil refinery operations – which previously had benefitted from the low oil prices (low input costs) – are now also suffering. Reserves have become so large that all the storage tanks are full, and operations have ground to a halt. However, in the long term Shell should benefit from the integration of British Gaz, with the lower pound sterling providing an additional boost. With the pound down, brewing company AB Inbev (which also underperformed slightly) has raised its bid for SAB Miller a little. Although the communications and the negotiations about the takeover have been put on hold for the present, it seems that SAB Miller will accept this higher bid too. If it does, the resulting enterprise will be the largest brewing company in the world by far.

The stars on the stock market last week, by a clear margin, were the technology companies, and in particular Internet-related firms. Facebook, for example, realised a strong growth in revenue, advertising income and user numbers. Obviously these growth figures cannot be maintained indefinitely, and the company itself is predicting a slight downturn during the second half of the year and in 2017. Nevertheless, for the present the results are rock solid, and difficult for newcomers to surpass. Alphabet (the umbrella company that owns Google and some others) and Amazon also easily outperformed the forecasts – which were already far from pessimistic – with surges in revenue and income. Amazon’s revenue was up by 30%, the growth of its cloud services (by 60%) standing out in particular. As with Facebook, the big question is when this growth will hit the point of saturation. In the United States, the S&P 500 recorded a slight loss relative to the Friday before, while the NASDAQ was up by more than 1%. In the Netherlands Philips reported an impressive surge, with net earnings up 57% to EUR 431 million (although this figure includes a one-off gain of EUR 144 million). The company is expected to feel the hurt of the lower pound sterling in the near future; however, CEO Van Houten has announced that the company will not cut back its operations in the United Kingdom. On balance the AEX, in line with most of Europe’s stock markets, recorded a loss relative to the Friday before (down -1.2% to 447.82 points). On Friday morning the index was up again slightly by around 0.3%.

In the spotlight: the solution to Italy’s banking difficulties

The earnings season will slow down this week, particularly in the United States. The outcome of the European Banking Association’s stress test among 54 major European banks is expected to create some fireworks when it is announced on Friday night (29/7). The results of the stress test will be important chiefly for Italy’s largest banks and for Deutsche Bank. The main concerns for the Italian banks are their lack of capital and the uncertainty of whether the Italian government is permitted to compensate the shortfall. At present, the solution seems to be a fund formed by major investment banks to minimise the impact on bondholders (in particular those in Italy). Another factor at play here is the referendum about Prime Minister Renzi’s reforms, scheduled for early in October: if bondholders are unhappy, the referendum could quickly turn into a vote to determine the level of confidence in Renzi.

The principal macroeconomic news is the sentiment among purchasing managers, with final figures set to be published following last week’s provisional figures. Little other news is expected this week, beyond the announcements of retail sales in the European Union, industrial output in Italy and industrial orders in Germany. The United States will present new data about consumer spending, and on Friday the monthly job report and unemployment figures for July will be announced. Corporate earnings will be published in the United States, by Berkshire Hathaway (Warren Buffett’s fund), Priceline, Devon Energy, Procter & Gamble and Ecolab. In Europe a range of financial institutions will announce their earnings, including HSBC, AXA, Allianz, Credit Agricole, Société Générale and Royal Bank of Scotland. Other companies publishing their results include Motorola, Siemens, Adidas, Metro, Veolia and BMW, and in the Netherlands ING, Heineken and DSM.


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