The events that make June such an interesting month are rapidly approaching. Next week the Fed’s policymaking committee meets, a week later the UK’s referendum is scheduled and three days after that Spain will hold parliamentary elections. What will happen?
Op de financiële markten is - afgezien van wat rimpelingen - nog niet veel van de spanning te bespeuren.
Ben Steinebach Head of Investment Strategy
Following the harsh disappointment of May’s jobs report that was published in the United States the week before last (38,000 jobs), the Fed’s meeting is set to be a non-event. Given the circumstances, it seems unlikely that the policymaking committee will decide to implement a rate hike. One of the factors in their considerations will certainly be a desire to avoid creating added tension if the UK public vote for a Brexit and if the Spanish elections yield another impasse. The outcome of the UK referendum appears to be a close-run thing, at least going by the various polls. Last week the financial markets went into a turmoil when two of the polls suddenly indicated that a majority is in favour of a Brexit. However, going by the bookmakers, where the UK public are willing to put their money where their mouths are, a Brexit is still quite a long way off: 57% expect the UK to remain part of the European Union. The explanation that is given for this difference is that people who want the UK to stay in the EU are not easily reached by the polls. They form a silent majority, as it were, whose votes on 23 June might result in the UK actually remaining part of the EU. This effect is more visible at the betting shops, the argument goes.
A few ripples aside, the financial markets are as yet showing little sign of any tension. The UK stock market in fact outperformed the exchanges on the Continent slightly. As a Brexit will presumably hurt the British pound, the foreign exchange market is under close scrutiny. Admittedly the pound has fallen slightly against the euro this year, yet so far the losses have been minor. Activity is increasing on the option market, however, which investors use as protection against potential losses if a Brexit becomes reality on 23 June. The bond markets are also showing little sign of concern about a Brexit: although the British 10-year yield is higher than that in Germany and the core countries of Continental Europe, it is falling at a pace similar to that of the Continent.
Bond market seeking to break through the glass floor
Bond yields in Europe are falling to new lows. In Germany, 10-year government bonds reached a new record of 0.02% this week. The primary cause is the renewal of activity by the European Central Bank. It is only a matter of time before 10-year yields also fall into negative values. They already reached that situation some time ago in Japan, where even 15-year yields dipped below 0% last week. Just as Hillary Clinton is breaking through the glass ceiling in the United States, Europe’s bond markets are breaking through a glass floor. The only question is precisely where that floor is. The principal factor explaining the new drop in yields is ECB policy: last Wednesday the Corporate Sector Purchase Programme (CSPP) started, allowing bonds of investment-grade non-financial companies to be purchased. The CSPP, which comes as an addition to the purchase programme for government bonds, is expected to involve spendings of EUR 5-10 billion per month. This has forced yields down across the board (all maturities and types of bonds). Coupled with the expenditure on government bonds, the bond-buying programme now involves EUR 80 billion per month, and will continue until the end of March 2017.
Last week’s developments on the global financial markets were therefore dictated by the ECB and by the expectations surrounding the UK referendum in particular. Little relevant macroeconomic news was published, and what there was presented a mixed picture. For example, Germany’s industrial orders fell more sharply than foreseen in April, while the country’s industrial output for the same month outperformed expectations. On the stock markets, the United States and the United Kingdom recorded slight gains relative to the Friday before, while the Continental markets lost a little. In Amsterdam, new companies went public on Friday, 10 June: ASR and Basic-Fit. On Thursday the AEX closed at 446.10, up 0.18% from the Friday before. The week started largely positively, but by Wednesday some risk aversion had crept in. On Friday morning the index was down, like other European markets, fluctuating at around 440 points.
All eyes on the Fed for now
Although the earnings season is over, here and there companies are still reporting their results. This week it is Oracle’s turn. Macroeconomic data will draw some attention, and for the remainder all eyes are on the Fed and looking ahead to 23 June. China occupies a prominent place on this week’s macro calendar. Late in the weekend it will report retail sales, investments, industrial output and the increase in the money supply, all for May. Various countries are also scheduled to publish inflation figures – also for May – this week: the United Kingdom, Italy, France, the European Union as a whole and the United States. Besides China, the United States, the Netherlands and the United Kingdom are also scheduled to release new data for retail sales in May. Industrial output figures in the United States (May) and the European Union (April) will be published, while lastly meetings of the central banks of the United Kingdom and Japan are scheduled, where they will interest rates. First and foremost, though, the focus will be on the Federal Reserve, which will announce at quarter past eight on Wednesday what steps it plans to do about interest rates. We believe that it will leave them alone, in the 0.25%-0.50% bandwidth – it will be more interesting to see the accompanying comments.