The week began with falling oil prices and gloomy markets. When the oil price started to rise, however, sentiment turned more positive. Bond prices fell across the board.
The equity markets were not only influenced by the macro-sentiment last week, but also by corporate results.
Ben Steinebach Head of Investment Strategy
The oil-producing countries failed to reach agreement in Doha last weekend on curbing production, leading to pressure on oil prices at the start of the week. Later in the week – following a strike in Kuwait and the announcement of lower oil stocks in the United States – sentiment on the oil markets turned around and the price of Brent oil from the North Sea rose above USD 45. That was the most important factor driving share prices last week, seeing them continue to move upwards on Tuesday and Wednesday.
The meeting of the European Central Bank (ECB) on Thursday produced little to get excited about, in any event less than the March meeting. ECB president Draghi did however state that the ECB is ready to intensify its policy further, and believes that this will be necessary because the long-term outlook suggests that inflation will remain well below the target of (just under) 2%. Moreover, the euro has strengthened against the dollar somewhat in recent weeks, increasing the pressure on import and other prices. This is not likely to lead to further interest rate cuts (i.e. deeper into negative territory), but will probably prompt a further expansion of the bond purchase programme. The ECB bank lending survey in the first quarter did show that euro area banks have (further) eased their lending terms, and there has also been an increase in borrowing demand from non-financial businesses. This can be seen as a positive signal for the economic outlook for the euro area, a notion supported by the recovery in the ZEW index for Germany and the euro area in April, which provides an indication of the propensity to invest by investors in the region. There are also downside risks, however, particularly in Southern Europe (elections in Spain and renewed difficulties in the negotiations with Greece) and the United Kingdom (referendum on a possible Brexit). These risks have contributed to falling bond prices and rising bond yields.
Caution the watchword in marking business outlook
The equity markets were not only influenced by the macro-sentiment last week, but also by corporate results. Those results showed a mixed picture, while few businesses are painting a positive picture going forward. Analysts have for some time been downrating the outlook for oil companies and financial service-providers. This means that any further major disappointments are unlikely, though the details could still hold some painful surprises for the markets. For example, the American oil service provider Schlumberger published results which, at 40 US cents per share, were reasonably in line with expectations, but still 60% lower than last year. The company is also being badly hit by the falling supply of oil, prompting the announcement of 3,000 further redundancies on top of the 90,000 already announced earlier. In the Netherlands, Akzo-Nobel managed to lift net profit by 50% to EUR 240 million, despite a reduction in sales of 4% due to adverse currency effects. Although the company referred to challenging (for which read ‘difficult’) market conditions, the share rose by 5.3% following publication of the results. In the aviation sector, there were rumours that Air France-KLM is eyeing a takeover of its Spanish peer Air Europa. Both companies are already members of Skyteam. Air Europa brings large numbers of passengers (many of them tourists) from Spain to Paris and Amsterdam, where they link up to Air France-KLM for onward intercontinental transport. The results posted by ASML disappointed somewhat; although the company sold 28 new chip machines and five used systems in the first quarter, the drop in sales of EUR 300 million to EUR 1.3 billion was a little disappointing. The same applied for the sales forecast of EUR 1.7 billion for the second quarter.
The AEX closed at 453.47 points on Thursday, an increase of 0.64% compared with Friday of the previous week but well behind the German DAX (+3.8%) and French CAC-40 (+2%), and more in line with the performance of the US market. On Friday morning, the index was hovering just above 450 points.
A busy week ahead for numbers
The coming week is going to be a very busy one, both in terms of publication of corporate results and macro-economically. Lots of confidence indicators will be published, for example, both for businesses and consumers. The Belgian business confidence index in April is an interesting one to watch, because it often proves to be a good indication of business confidence in other European countries. This will be followed by the publication of a business confidence indicator for the European Union as a whole as well as indicators for Germany (Ifo), Italy and the Netherlands. The coming week will also see the presentation of large amounts of data on purchasing the sentiment of purchasing managers in the services sector in April in a great many countries. The week ahead will also see the publication of consumer confidence indicators for the United States (by both the Conference Board and the University of Michigan), Germany, France and the United Kingdom. The European Union will publish the Economic Sentiment Indicator for April, which combines producer and consumer confidence indicators. New numbers will also be published in the United States on orders for consumer discretionary goods, while Germany and Japan will publish figures on retail sales in March. An important factor for the ECB policy going forward will be the definitive inflation figures for April which will be published for the euro area as a whole, as well as for Germany, France and Italy. Also interesting are the adjustments to the growth in Gross Domestic Product in many countries, and finally the outcome of the policy meeting of the US Federal Reserve.
There are too many companies to present a complete picture of corporate results. In my view, the most important companies at international level are the oil companies Chevron, Exxon Mobil, Total, BP and Statoil. We are of course also looking closely at Apple and Facebook and at Amazon and eBay. Finally, we are keeping a close eye on the financial service-providers Deutsche Bank and MasterCard and on a number of pharmaceutical companies, including Glaxo SmithKline, Astra Zenica and Gilead Sciences. In the Netherlands, we will look with interest at the first-quarter results of DSM, KPN, Randstad and TNT Express.