The sting was in the tail

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The package of measures that the European Central Bank (ECB) announced last Thursday far exceeded investors’ expectations. After an initial rally, however, equity markets still closed in the red.

The coming week will be an extremely meagre one in terms of company news. Consequently, the focus next week, as in the past week, will be on macro events -which could include some interesting items. Ben Steinebach Ben Steinebach Head of Investment Strategy

Needless to say, all eyes on Thursday were focused on ECB Chairman Mario Draghi. . Whereas in December he underwhelmed markets by failing to expand the EC’s bond purchasing programme, this time he shock-and-awed them with radical measures. The deposit rate – the rate that banks receive for money they deposit with the ECB – was reduced again, from -0.3% to 0.4%. The Governing Council did, however, reject the idea of introducing a two-tier rate, higher for smaller deposits and lower for larger ones. Chances are they would have chosen this course if the rate cut had been more drastic. Furthermore, the refinancing rate and the marginal lending rate were both lowered by 0.05% to 0% and 0.25% respectively. But the real fireworks were in the bond purchasing programme, which was expanded by a whopping EUR 20 billion to a total of EUR 80 billion a month. This was beyond investors’ wildest dreams. And the programme has not just got bigger, but also broader: the ECB is now also allowed to buy investment-grade corporate bonds. And finally, the Governing Council announced that it would be launching four Targeted Long Term Refinancing Operations (TLTROs) – one in each of the next four quarters –to which the new refinancing rate (0%) will apply. As banks ratch up their lending, this rate can drop even further, into negative territory, meaning that they will actually be paid to borrow from the ECB. The central bank’s accommodative stance was prompted by the grim growth and inflation outlook for the eurozone. The ECB’s forecasts have been downwardly adjusted again, with this year’s inflation forecast now at 0.1% (previously 1%). Although the ultra-low level of inflation (-0.2% in February) is chiefly attributable to lower oil prices, the ECB is deeply concerned about the risk of deflation. Meanwhile, oil prices have rallied strongly from their January lows, making it questionable whether inflation will really stay this low through 2016.

The sting was in the tail of Mario Draghi’s press conference, however. He remarked that he expected interest rates to remain low for an extended period of time, but that rates are not likely to move much lower. Global equity markets, which had soared at the news of the ECB’s new measures, promptly retreated and ended the day down on Wednesday. Bond markets, which had been at elevated levels all week, also slumped on Thursday afternoon. These trends probably reflect justified doubts among investors whether the proposed measures are really necessary, given the risks they also entail.

Improved fundamentals in Europe

Belying the deteriorating economic outlook for the eurozone as presented by the ECB, last week’s actual economic data was encouragingly strong. The jump in German industrial production was a particularly pleasant surprise. The ECB has toned down its eurozone GDP growth forecasts for 2016 and 2017 to 1.4% and 1.7% respectively (from 1.7% and 1.9% respectively). For 2018 the ECB foresees 1.8% growth. Its inflation forecasts have been downwardly adjusted to 0.1% in 2016 (from 1%), 1.3% in 2017 (from 1.6%) and 1.6% in 2018. Of course, it remains to be seen whether the current recovery of oil prices is sustained and at what level they ultimately stabilise. Given that the price of Brent oil has surged from USD 27 a barrel in January to USD 40 now, inflation could well turn out higher than currently projected. We now know that eurozone GDP growth in the final quarter of 2015 was 1.6% year-on-year, thus slightly higher than the preliminary figure published earlier. Obviously, this is no guarantee that momentum will last, but neither does it justify deep concern. Meanwhile, the gloom is being fed by numerous market gurus like investor Jim Rogers, who is 100% certain that the United States is heading for a recession in the next twelve months.

In Germany, news broke that January industrial production was not 0,5% up on December as projected earlier, but a spectacular 3.3%. In several other countries, too – including the United Kingdom – production beat expectations. Germany’s industrial order book did contract slightly, but not by as much as anticipated. The industrial sector upturn was also reflected in the 19% increase in the price of iron ore. This partly explains why on Wednesday – when this data was published - ArcelorMittal outperformed the AEX index. On Thursday the AEX, like most other indices, was dragged down by Mario Draghi’s famous last words, closing 1.8% down on last week Friday at 430.18 points. This put the Netherlands’ main index slightly ahead of the European average (the Eurostoxx-600 fell 2.4% in the same period), but behind most US and Asian stock markets.

Focus shifts from ECB to Federal Reserve

The coming week will be an extremely meagre one in terms of company news. Consequently, the focus next week, as in the past week, will be on macro events -which could include some interesting items. As far as earnings announcements are concerned, the list of companies to watch this week is short, featuring only BMW, Münchener Rück, Oracle and Altice. Other news is that Ten Cate will be withdrawn from the Amsterdam and London stock exchanges on Thursday 17 March, as the Gilde-led consortium now owns near 100% of the shares.

On the macro-economic front, lots of interesting data is to be released next week. The first to appear will be Chinese retail sales, industrial production and investment data. Next are Japanese machine orders over January. There will be key February inflation data releases on France, Italy, the European Union and the United States. We can also expect a flurry of US data on industrial production, new housing starts and retail sales (all in February), plus the University of Michigan’s preliminary consumer sentiment reading for March. In addition, there will be a meeting this week of the FOMC, which sets Fed policy, where it will become clear whether February’s strong job growth, as announced last week, will trigger the next interest rate hike. The Bank of England’s Monetary Policy Committee will also be meeting this week. Finally, in the Netherlands, data will be released on consumer spending and sentiment in February and March.


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