ECB drives down bond prices

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Shaking hands agreement deal

Central banks were yet again the driving force across markets in the week that was, as both US Federal Reserve and ECB policy meeting minutes suggested less accommodating policies. As a result, bond prices dipped while yields moved smartly up, especially on Thursday.

On the G20 agenda features three key issues: trade, the Paris climate change agreement and the outlook for Africa. Ben Steinebach Ben Steinebach Head of Investment Strategy

However, the two central banks are currently at different stages in their cycle. As expected, the Federal Open Market Committee (FOMC), the Federal Reserve’s monetary policy committee, indicated a further gradual increase in interest rates. The sting in the tail was that the Fed expects to stop rolling over a range of maturing bonds before the year is out, thus shrinking its balance sheet – another tightening move. The minutes of the ECB’s June meeting for the first time suggested a decreasing likelihood of further rate cuts. The time spent on discussing the actual timeline for reducing asset purchases proved the devil in these minutes’ detail. Although bond yields held fairly steady in the week, they suddenly shot up on Thursday. Equity markets were also affected and fell in line with bond prices. In the United States, leading equity indices ended Thursday below the previous Friday’s showings on balance. In Europe, by contrast, the start of the week had seen a recovery from the sharp downturn on Friday 30 June, and not all gains were lost.

G20; Trump meets Putin

Leaders of the world’s 20 leading economies will meet in Hamburg on Friday and Saturday, amidst fierce protests and geopolitical tensions. The US and Russian presidents will meet for the first time. The summit’s agenda features three key issues: trade, the Paris climate change agreement and the outlook for Africa. There’s major disagreement between the United States and particularly Europe on the first two, while – more on the side lines – Trump is expected to take Putin to task on Russia’s destabilising policies in Ukraine. Trump will also speak to government leaders from China, Japan and South Korea about the threat posed by North Korea. On many issues, there’s a distinct lack of clarity on the views of Russia and several big emerging countries, in particular India, Brazil and South Africa, and it is highly unlikely that the G20 nations will put up a show of unity and issue a unanimous communiqué. Emerging geopolitical tensions might well have a negative effect on the financial markets in the week ahead. We note that the European economy should be able to weather such storms just fine, as it’s been enjoying an extraordinarily robust run. In the past week alone, solid figures were released for both retail sales and purchasing manager sentiment in European industry.

AEX pretty much flat

Despite a rather volatile week, the AEX index closed more or less flat, as there was little in the way of corporate news to make waves. This should change next week as the second-quarter reporting season kicks into gear. The AEX index reported a small loss of 0.5%, but the week saw greater vicissitudes than this rather flat final showing suggests. Amsterdam’s main gauge moved between 514 and 506 and is currently at around the 509 mark. Sentiment in the week was once again largely determined by central bankers’ comments, with bond markets even more affected than the equity markets. Still, interest rate-sensitive equities did feel the pain. Topping the list of the week’s losers was Unibail-Rodamco, which saw 4.1% wiped off its share price. It was followed by Randstad (-2.6%), Galapagos (-2.4%) and publishers Wolters Kluwer and RELX (both -1.9%). Gainers were mostly financial services providers: Aegon (+6.5%), NN (+4.7%), ABN AMRO (+3.6%) and ING (+3.3%). Digital security provider Gemalto (+3.2%) completed the top five. TomTom had a bit of good news to report in the week: it will team up with Baidu – China’s Google – to develop maps for driverless cars. PPG being put firmly on the side lines for at least six months hasn’t stopped activist shareholder Elliott from stirring the waters at Akzo; Elliott has initiated new legal proceedings aimed at forcing a meeting of shareholders to call for the resignation of the chairman of the company’s supervisory board. Elliott also reported that it has taken a 9.5% stake in Akzo.

In a separate development, HAL Trust notified Coolblue of the purchase of another 10% in the latter’s stock, bumping up its holding to 30%. Coolblue is the second biggest online retailer in the Benelux region after Food retailer Jumbo made a play for Sligro’s Emté supermarkets, but Sligro has so far rebuffed its new suitor. In the international arena, Qualcomm and Apple are in a legal tussle over payment for Qualcomm’s technology in Apple’s iPhone, with Qualcomm filing patent infringement complaints against Apple in the week. Samsung reported better-than-expected figures: global demand for semiconductors remained robust and its new Galaxy S8 has been selling well. Just before the start of the results season, maker of Durex condoms Reckitt Benckiser and Mondelez warned that this past month’s cyber attacks have hit sales. Bayer also issued a profits warning due to unexpectedly higher inventory in its crop protection unit in Brazil. US payments processor Vantiv this week bagged British rival Worldpay Group for a consideration of GBP 7.7 billion. Meanwhile, the European Commission announced fines for General Electric, Merck, Sigma-Aldrich and Canon for not providing information required under EU merger rules.

Lastly, the week brought a spate of auto industry news. June sales in the US came in slightly ahead of expectations but US players in particular recorded annualised losses. Volvo announced that, from 2019, it will produce models with electric engines only, while Tesla saw its share price plummet by over 20% from its June highs, as the markets worry about disappointing sales.

First batch of Q2 2017 results

The second-quarter results season will kick off in the week ahead, restoring a sense of direction to the equity markets. In macroeconomic terms, it should be a calm week, offering a few interesting pieces of data. In line with tradition, US banking majors will kick off the new results season, but Pepsico is also on the roster. Among the banking majors, Wells Fargo, JPMorgan Chase and Citigroup are all slated to release their results on Friday. A few banks, including JPMorgan, have already warned that client trading activities in their investment banking divisions disappointed due to low financial market volatility in the second quarter. As these warnings are likely to have lowered expectations, there’s now room for positive surprises when the results are actually presented. In addition to trading activity, loan growth is also declining in the US, although interest margins should improve on rising interest rates. Finally, all US banks recently passed their stress tests, indicating healthy balance sheets and little likelihood of negative surprises.

Macroeconomic news will bring the Federal Reserve’s Beige Book about economic trends in the various Federal Reserve districts. The US will also see the latest figures for the Labor Market Conditions Index (June), a key measure for Federal Reserve policy. In addition, quite a few countries – e.g. China, the US, Germany, France and Italy – will publish the latest data on inflation trends in June, while other interesting data include industrial output in Italy, the Netherlands and the EU as a whole, as well as retail sales in the US and the Netherlands. The most pertinent figures will be released in the US this afternoon (Friday): employment and joblessness data for June. We are expecting an increase of 177,000 jobs, but the actual number will be known by the time you read this.


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