Oil prices and Deutsche set the tone on the financial markets

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Oilrig

The tone on the financial markets was somewhat downbeat last week, initially through concerns about the situation at Deutsche Bank, while the unexpected agreement between the OPEC countries dominated the latter part of the week. By and large, the macro news was encouraging.

Given Germany’s criticism of Italian Prime Minister Renzi’s attempts to save Italy’s banks this past summer, and Chancellor Angela Merkel’s precarious position, it is unlikely that the German government will undertake any form of rescue operation. Ben Steinebach Ben Steinebach Head of Investment Strategy

The agreement between the OPEC countries about an oil output ceiling came completely out of the blue. Saudi Arabia had previously refused to impose a unilateral output freeze. However, an agreement was reached last Wednesday, although it has yet to be ratified at the next meeting (on 30 November) and it remains unclear at present how the output scale-backs will be spread across the member countries. Moreover, with a bandwidth of 32.5-33 million barrels, the targeted output ceiling is still a million barrels higher than the output at the end of 2015.

Despite this, the financial markets were buoyed by the immediate rise in oil prices. The price of a barrel of North Sea Brent went from around USD 45 on Tuesday to almost USD 50 (though it lost some of that ground later). Some of this positive sentiment derived from the fact that Russia also seems to be committed to the agreement.

On the macroeconomic side some encouraging developments were reported last week. In Germany it was announced that business confidence (the Ifo index) improved to 109.5 in September, against 106.3 in August: the largest increase since July 2010. Confidence among consumers and manufacturers in the European Union also improved more than had been expected.

Similar figures were released in the United States, where confidence among consumers also rose by more than predicted. The third estimate of the gross domestic product for Q2 again adjusted the increase upward (from 1.1% to 1.4% on an annual basis), while orders for durable goods outperformed expectations in August, indicating an upward trend in capital expenditure during Q3. It would be safe to assume that the Federal Reserve has every reason to raise interest rates in December after all.

Deutsche, Deutsche, Deutsche

Not only Deutsche Bank made the headlines last week: Deutsche Börse and Deutsche Post did too. Naturally the news about Deutsche Bank had the greatest impact on the financial markets, in part given the pressure that it places on the whole financial sector. The positive effect of the macro news from Germany (business confidence) on the stock markets was largely neutralised by concerns among investors about the problems at Deutsche Bank. The bank’s cash reserves and solvency are healthy enough that it can pay the USD 14 billion fine that the US Justice Department has imposed for the bank’s role in the American mortgage scandal. However, the markets are concerned that paying the fine will push the bank beyond some of the critical limits for liquidity and capital position. Amplifying this is the consideration that the large cash reserves serve as a buffer for the bank’s very high derivatives position – far higher than most similar-sized international banks. In these cases it is vital to maintain confidence and prevent a panic that might carry over to the numerous other banks that have exposures to Deutsche Bank.

Given Germany’s criticism of Italian Prime Minister Renzi’s attempts to save Italy’s banks this past summer, and Chancellor Angela Merkel’s precarious position, it is unlikely that the German government will undertake any form of rescue operation. Shareholders and bondholders will therefore pay the price if the problems become untenable.

Other takeover news

Deutsche Börse and Deutsche Post are busy seeking closer ties with the United Kingdom. The former is seeking to merge with the London Stock Exchange. However, the European Commission does not appear receptive to these plans and wants a detailed investigation of how competitive the European stock market landscape is. Deutsche Post hopes to buy UK-Mail, in order to acquire a more pan-European network through the British company.

Qualcomm of the US was another source of takeover rumours last week. The largest manufacturer of mobile telephone chips reportedly wants to acquire Dutch company NPX for around USD 30 billion. With the market for mobile telephones approaching saturation, Qualcomm hopes to use NPX to expand its market to other applications. The rumours caused Qualcomm’s stock to surge by almost 10%, and NPX’s by twice as much.

At close of business on Thursday most of the leading stock markets were down 0.5% to 2% from the Friday before. The AEX was down 0.6% to 451.55 points, putting it at the lower end of the spectrum of losses. Without exception Europe’s markets were in the red on Friday morning, with the AEX at a little higher than 445 points.

All eyes on employment in the US

Two companies will publish their Q2 earnings this week. Some macro news is also expected, though not much that will trigger movement on the markets. One exception is the US jobs report that will be released on Friday. The two companies are ST Micron Technology and Monsanto, the seed improvement company on which Bayer has set its sights.

Macroeconomic news to look for includes the final data about the sentiment among purchasing managers in September. These figures, which most countries are set to announce on Monday (for industry) and Wednesday (for services), are expected to be largely in line with last week’s provisional data.

Other anticipated news includes the European Union’s industrial producer prices for August and Dutch consumer prices for September. It will be interesting to see whether the upward trend displayed by the German consumer prices last week will carry over to the Netherlands. New data will also be published about Germany’s industrial orders for August and about output in Germany, France and the Netherlands. Further interest will be generated by data about the latest retail sales situation in the European Union for August. However, the highlight will be in the United States on Friday, with the publication of the monthly job and unemployment figures at 2.30 p.m. Following the disappointing rise by 151,000 in August, the overall expectation is for 164,000 new jobs to be added in September.

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