With very few exceptions, stock markets worldwide fell last week. Investors experienced renewed doubts about the outlook for the global economy. Their concerns were also reflected on the bond markets, where yields dropped once more. Although the eurozone economy outperformed the forecasts for Q1 – growing by 0.6% relative to Q4 of 2015 – the markets are still prey to concerns about the economic outlook.
Although the majority of listed companies have by now published their earnings, a few heavyweights are scheduled for this week.
Ben Steinebach Head of Investment Strategy
These concerns are valid. Eurostat published its first ‘flash estimate’, two weeks ahead of schedule and based in part on estimates of as-yet unpublished indicators. The forecasts for those indicators are not universally optimistic. The sentiment among purchasing managers in industry is very flat – and not in Europe alone – and points toward a slow growth rate in that sector. Europe’s retail sales also performed poorly in March, down 0.2% relative to February.
Where previously the economic growth rate data were rarely adjusted, the likelihood is much greater with a flash estimate. In light of the developments described above, it seems more probable that they will be lowered, and the financial markets are apparently making allowances for this. Every single one of the leading stock indexes fell. Losses in the United States were minor, with the S&P 500 down 0.7% and technology index Nasdaq falling 1.2%. In Europe, however, the markets lost more than 2% relative to the Friday before.
The concerns also manifested on the bond markets in the form of increasing risk aversion, particularly on the markets that are regarded as safe havens. In the United States and Germany, 10-year yields were down some ten basis points to 1.75% and 0.16%, respectively. Yields in Southern Europe conversely rose marginally.
Philips set to spin off its traditional core activities
Although the earnings season has already peaked, a few interesting companies still remained to present their Q1 results. Early in the week Philips announced its plans for a separate IPO of its lighting division. Originally the company had hoped to sell the division to a single buyer. However, no prospective buyers have come forward, and Philips has now decided to float 25% of the shares in the division separately before the start of summer. This will represent the completion, more or less, of the company’s efforts to become less cyclic and to shift its principal focus to healthcare technology.
Many of Europe’s banks presented their earnings last week, offering a mixed bag. Banks with a strong focus on capital market operations in particular (for example UBS in Switzerland and HSBC in the United Kingdom) reported disappointing results, following the turbulence on the markets during the first quarter. UBS’s net income fell 64% to CHF 707 million, with revenue down 23%, triggering an 8% drop in the bank’s stock. HSBC’s income plunged 14% to USD 6.1 billion, owing chiefly to a downturn in the bank’s substantial Asian operations. BNP Paribas, a typical consumer bank, recorded encouraging results: although revenue was down slightly, its income rose 10%. One reason for this increase was the diminished allowances for bad debts.
In the United States, the income and revenue of pharmaceutical giant Pfizer’s both rose by double-digit percentages. The Hospira acquisition in particular contributed to the 27% increase in income. Last month, the world’s largest pharmaceutical company decided against a USD 160 billion deal to take over Allergan. With oil and gas prices remaining extremely low, Royal Dutch Shell saw its income drop by more than half. The company completed its acquisition of British Gas during Q1, so its quarterly earnings include part of BG’s earnings. However, Shell’s results were not quite as poor as had been feared, and cutbacks in operating costs in particular provided some counterweight. The same pattern was also apparent at other oil companies, particularly those with their own refinery operations. Nevertheless, as a heavyweight Shell depressed the AEX, which closed last Thursday at 431.24 points, down 1.9% from the Friday before. On Friday morning the index was fluctuating at around 428 points.
Focus on economic growth in Europe
Although the majority of listed companies have by now published their earnings, a few heavyweights are scheduled for this week. The emphasis will then gradually shift back to macroeconomic news. Various companies in the US will publish their Q1 earnings this week, including Coca-Cola and Walt Disney.
The list of European companies is somewhat longer, and includes Alcatel Lucent, Allergan, Telefonica, Telecom Italia, E.On, RWE, Vivendi, Endesa, Adecco, Nokia, Metro and financial service providers Allianz, Credit Suisse, Credit Agricole and KBC. In the Netherlands we look forward to the announcements by ING, Aegon and PostNL. Moreover, Friday will be the final trading day for TNT Express before it is swallowed by US giant Fedex.
In macroeconomic news the focus will be on industrial output, with March data being published in Germany, France, Italy, the Netherlands, the UK and the European Union as a whole. Germany will also release new data about industrial orders for the same month. In Germany, France, Italy and the Netherlands further details about movements in consumer prices in April will be announced, and the Netherlands will present its retail sales for March. After last week’s flash estimate of economic growth in the eurozone, various countries including Germany, Italy and the Netherlands will publish their own growth data this week.
The first news will come from the US, where details will be released about non-agricultural employment and unemployment in April. By the time you read this, we will already know whether the optimistic forecasts of around 200,000 new jobs have become reality.