Draghi laying low

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Map of the world with shares figures

After dropping clear tapering hints at the June ECB forum in Sintra, Portugal, Mario Draghi wouldn’t be drawn on the state of the asset purchase programme in the week that was.

Corporate demand for bank lending has increased as a result, also reflecting favourable economic data and robust prospects for the European economy. Ben Steinebach Ben Steinebach Head of Investment Strategy

The financial markets were fairly flat in the past week, with US equity markets doing somewhat better than their European counterparts through Thursday – the AEX index being a positive exception – and bond prices edging up. The mood improved towards the end of the week, as corporate results generally came in ahead of expectations and ECB president Draghi’s press conference on Thursday also cheered. In contrast to his comments at the end of June, this time he refrained from mentioning either a start or a timeline for asset purchase tapering, apparently feeling that, since the end of June, the financial markets had gone too far in their anticipation of higher yield prices – which promptly materialised. Coupled with the stronger euro against the US dollar, this had helped tighten monetary conditions and Draghi noted that, although he still believes inflation will go up in the months ahead, he wanted to see this happening first before any tapering. His only hint was that there should be greater clarity about the wind-down of the asset purchasing programme by the autumn. 

Meanwhile, lending to companies would appear not to be an obstacle to any such a tapering move: the recent Bank Lending Survey (BLS) found that, in July, lending conditions as imposed by banks eased a little and predicted more easing in the months ahead. Corporate demand for bank lending has increased as a result, also reflecting favourable economic data and robust prospects for the European economy.

AEX stands out

On Thursday, most European equity markets closed below their showing for the previous Friday. The AEX index was the exception: it gained 1% on the back of favourable releases by a few companies. The US results season is further along than Europe’s, with most companies having reported better results than expected and stock markets upbeat. 

The US banking majors were among the companies that came in ahead of expectations. Although interest income was down at most of them, including Bank of America, and a player such as Goldman Sachs reported disappointing news on its bonds, currencies and commodities activities, profits rose faster than anticipated. This was mostly down to upside surprises in consumer divisions, private equity investment and hefty cost-cutting.

Although most US technology companies are scheduled to release results next week, Netflix and Microsoft afforded the markets a glimpse of what’s in store. Netflix sailed past predicted subscriber adds, with revenue ahead of projections. Although its profits slightly undershot expectations, its share price powered ahead by over 13%. In a separate development, Microsoft’s revenue and earnings beat expectations on robust growth in cloud services – in which the company has even encroached on its key rivals Amazon and Google. 

Visa also returned solid figures on the back of rudely healthy US and European economies, and has raised its guidance for full 2017. In Europe, Iberdrola posted slightly disappointing earnings but its revenues were more or less in line with expectations. The Spanish utility company was hamstrung by a strong euro, its exposure to Brazil and the need to look for – more expensive – alternatives to electricity from its hydroelectric power plants in Spain, which have been hit by extreme drought. 

The week’s crop of releases in the Netherlands included ASML, TomTom and Unilever. ASML reported second-quarter sales of EUR 2.1 billion compared with the expected EUR 1.9-2.0 billion, while earnings per share worked out at EUR 1.08 compared with a projected EUR 1.04. ASML’s guidance for the third quarter puts sales at around EUR 2.2 billion and gross margins at 43%. The chip maker claims to be on course to grow its sales by 25% (annualised) as new EUV equipment is predicted to contribute around EUR 300 million to sales. 

TomTom beat average analyst expectations in the second quarter but has had to tone down its guidance for the full year. The company continues to transform from a hardware into a software player and is increasingly less dependent on selling satnav devices. These days, new cars often come with in-built navigation systems and margins are typically higher on software solutions. A good example of more profitable ventures is its collaboration with China’s internet company Baidu, announced at the beginning of the month, to jointly make maps of China for self-drive technology. 

Unilever reported an uptick in turnover of 5.5% to EUR 27.7 billion in the first six months of 2017, the net outcome of price increases and currency impact. Volumes were mostly flat. Its change programme, which started last year, is starting to pay off, and profit added a healthy 22.4% on year-earlier showings to EUR 3.3 billion. The global food and domestic products manufacturer is planning to cut its marketing by EUR 300 million and its logistics and overheads by EUR 700 million.

Releases by IT majors

The week ahead will feature another lengthy line-up of companies posting their second-quarter results, while the macroeconomic diary is also pretty full. Market watchers will particularly look out for fresh indications of purchasing manager sentiment. Among corporate results the most notable are big techs such as Amazon, Intel, Facebook and Alphabet, but these are just the tip of the iceberg. A selection of the long list in the United States: Chevron, Exxon Mobil, Halliburton, Merck & Co, McDonalds, Boeing and Anheuser Busch. Europe should see its results season gather momentum in the week ahead, featuring the likes of UBS, Credit Suisse, L’Oréal, Nestlé, Danone, Schneider Electric, Total, BASF, Telefonica, Glaxo SmithKline, Roche, Daimler, Renault and Peugeot. Most of our readers will of course want to know about Holland’s major players: the stage is set for Royal Dutch/Shell, Philips, AKZO Nobel, Randstad, RELX and KPN.

On the macroeconomic front, our first focal point this week will be the outcome of the FOMC meeting. We don’t expect the Fed to announce any interest rate hikes, but some news may emerge on balance sheet contraction. We’re also keen to see the provisional numbers on July purchasing manager sentiment in various countries as well as fresh data on business confidence, due out in Germany (Ifo), France, Italy, Belgium, the Netherlands and the European Union (EU) at large. New figures for July consumer confidence are slated for release in the US – both Conference Board and University of Michigan – France and Italy, with the EU publishing its Economic Sentiment Indicator. The US, UK and France will publish forecasts for second-quarter GDP, while industrial production and order data are due out in the US, France and Italy.

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