Do not call it tapering!

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On Thursday, the ECB announced it would start halving its asset purchase programme in January, to a monthly EUR 30 billion, but warned against using the term ‘tapering’, i.e. gradually winding down to nil.

The week brought a remarkable bounty of positive macroeconomic figures, suggesting a continued favourable economic climate in both the United States and the eurozone. Ben Steinebach Head of Investment Strategy

In the press conference he took after the ECB decision, President Mario Draghi pointedly observed that the ECB will not be tapering as its asset purchase amount will remain at EUR 30 billion up to and including September 2018. Of course, tapering was what the United States embarked on in 2014, when the term became popular. Not until after September 2018 will the ECB decide whether the time has come to gradually wind down its programme. For now, maturing bonds will be reinvested, making for very ample monetary conditions for quite a lengthy time yet. With government issues becoming increasingly scarce, corporate bonds will make for a larger proportion of the purchases. Interest rates are not expected to go up until the programme has ended completely, which is now expected to happen during 2019. The response in the markets was favourable: yields fell, and the euro dipped to below USD 1.1650, while equity prices advanced, particularly in the eurozone markets.

Macroeconomic figures pointing to growth

The week brought a remarkable bounty of positive macroeconomic figures, suggesting a continued favourable economic climate in both the United States and the eurozone. The week kicked off with the first round of provisional figures for purchasing manager sentiment in October. For the industrial sectors, these had risen more robustly or stayed at exceptionally high levels, without exception. Germany was in the latter group, seeing its index edge down just a fraction to 60.5 from 60.6, while the eurozone as a whole locked in gains to 58.6 from 58.1 and the United States advanced from 53.1 to 54.5 (50 implies neither growth nor contraction). 

By contrast, figures for the services sector revealed an across-the-board deterioration – if a minor one – reflecting not so much real activity in this sector but rather overall sentiment. Business confidence in Germany, as measured by the Ifo index, rose to a record high of 116.7 in October. Eurozone consumers were also found to be upbeat, demonstrated by consumer confidence showings for October.

The United States released two real-economy indicators instead of confidence gauges. Mainly boosted by transport equipment orders, September durable goods orders grew by 2.2% from the August figure, whereas a 1.0% increase had been predicted. New house sales also shot up in the same month, by 18.9%, particularly in the Southern states where the hurricanes had made many people homeless.

Global equity market prices were up across most regions in the week that was; by Thursday, only US markets had been unable to scrabble back from their losses earlier in the week. Eurozone stock markets got an extra boost from the ECB’s QE decision while Japan’s were still glowing in the aftermath of Shinzo Abe’s victory in the country’s parliamentary elections.

AEX index having a blast

Tailwinds propelled the AEX index ahead in the week, as some nice gains flashed up on the boards on the back of corporate earnings and the news from the ECB. 

Amsterdam’s main gauge added over 1% and now stands at its highest mark in the year: 551. In the corporate results arena, Philips started off the week. Previously ranked among industrials, but now a healthcare company, the Dutch blue-chip reported organic sales and adjusted EBITA in line with forecasts, while its robust order intake (+5%) exceeded expectations. Its results were driven by its Connected Care & Health Informatics businesses, and it repeated its full-year guidance.

Randstad posted results in line with what market-watchers were expecting, although its 9% organic revenue growth surprised on the upside. To date, October trends have been in keeping with third-quarter showings. Arcadis was finally able to please markets with an uptick, as its figures came in more or less in line with expectations and its 3% organic revenue beat forecasts. What’s more, its revenues moved into positive territory for the first time in nine quarters. RELX locked in organic revenue growth of 4% in the first nine months, reported continued balmy market conditions, and reiterated its full-2017 guidance. Heineken’s organic revenue growth was as expected in all regions except Europe and the Americas. In fact, Europe even reported a decline. KPN’s results pretty much hit the mark, BinckBank’s dipped slightly below expectations and Wessanen’s also disappointed.

The results season is in full flow and we’re just past the mid-way point in the United States. It’s been a good one so far, with 80% of S&P 500 companies enjoying better-than-expected earnings figures and 68% reporting higher revenue numbers. Not yet at its mid-way point, Europe is lagging these percentages to date, coming in at 52% and 44% respectively for the EuroStoxx 600.

International corporate news was equally thick on the ground. Procter & Gamble’s results disappointed; Daimler and Anheuser-Busch InBev released a mix bag; BASF reported solid numbers. America’s IT majors – Amazon, Alphabet (Google) and Microsoft – all caught the markets on the hop with steep growth figures. China’s Baidu, by contrast, trailed way behind projections. Total’s results were roughly in keeping with what the markets were looking for, the most positive news being that the oil major is managing to break even at ever lower oil prices. Lastly, 3M and Caterpillar both upped their outlook for 2017 as a whole.

Agenda filled to overflowing

Next week will see the earnings season continue apace with corporate news still flowing in at peak capacity. The macroeconomic slate is pretty full too: three central banks will issue pronouncements on their monetary policies, while the United States will release employment figures by the week’s end. 

A selection of the long list of names on the roster to post their results: ASM International (ASMI), Shell, DSM, ING, TKH, Bank of China, Agricultural Bank of China, ICBC, HSBC, Mastercard, Ryanair, Airbus, Pfizer, BNP Paribas, BP, Facebook, Allergan, Qualcomm, Apple, Alibaba, L’Oreal, DuPont and Societe Generale.

Shell is expected to be on course with its disposal programme, and recovering oil prices should benefit both earnings and dividends – which might now be moving towards a cash pay-out. The markets are predicting ING to have achieved stable underlying net earnings of EUR 1.32 billion. ABN AMRO is holding out for organic lending growth of 3.5%.

At the macroeconomic end, the focus will be on meetings at and subsequent decisions by the Bank of Japan, the Bank of England and the Federal Reserve. None of them are expected to announce such major policy changes as the ECB did last week. The Fed is expected to hold off raising rates until December, while the Bank of England is likely to take its cue from rising inflation to consider an early rate move. The Bank of Japan is expected to continue its asset purchase policies, particularly with the electoral mandate Abenomics received last Sunday.

A far from complete selection of other figures due out: plenty of final numbers on purchasing manager sentiment in most countries; new projections for third-quarter economic growth in many European countries; and the European Economic Sentiment Indicator scheduled for release. Following the Ifo’s record showing this past week, we’ll be interested to see if the European gauge offers a similar picture for October. Also interesting are the October inflation figures due out for various European countries. On Friday, the United States will top things off with its October employment and jobless figures. These are likely to include some catching up from September, when employment shrank by 33,000 jobs in the wake of the hurricanes.


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