Flat markets despite news deluge

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The week’s tsunami of news failed to stir the financial markets; highlights included a raft of corporate releases and the Federal Reserve’s rate decision.

The Federal Reserve kept interest rates unchanged but hinted that it is looking to shrink its balance sheet sooner rather than later. Ben Steinebach Ben Steinebach Head of Investment Strategy

The equity markets faced down a deluge of corporate releases and pretty much stood their ground in the week, as the US’s Dow Jones locked in gains while the S&P 500 and NASDAQ remained virtually unchanged. 

In Europe, the picture was mixed: the biggest falls were recorded by Germany’s DAX, which was buffeted by fresh scandals in the country’s car industry. The EuroStoxx600 closed on a small loss, while among the major Asian markets only Hong Kong managed to wrest a gain.

In the bond markets, US and German ten-year yields made only minor inroads in the week, even if spreads on investment grade corporate bonds contracted further in both Europe and the US while spreads on riskier high-yield paper didn’t move. The Federal Reserve kept interest rates unchanged but hinted that it is looking to shrink its balance sheet sooner rather than later.

Macroeconomic news failed to grab the markets. Despite a disappointing slide in provisional numbers, business confidence in the eurozone remains pretty stable. Business confidence in the US rose and beat expectations. Meanwhile, Germany’s Ifo index, another gauge of business confidence, was up whereas the markets had been expecting a fall.

Oil had a very good week and added well over 7%, taking Brent to over USD 50 a barrel, as US stocks shrank faster than expected and OPEC countries urged each other to observe production constraints. In a separate development, the euro continued its upward trajectory vis-à-vis the US dollar and nearly hit 1.18 before falling back to 1.17. Negative sentiment toward the dollar would appear to be a little overdone.

AEX also flat

Although several AEX blue chips reported their results, they failed to provide direction to the market gauge. The week’s releases were generally healthy. 

At around 527, the Amsterdam index remained virtually unchanged in the week that was. Philips kicked off on Monday, with sales and income from operations in line with expectations, and its order intake showing fine growth. On Tuesday, Randstad reported its steepest organic revenue growth since 2011 (9.3%) on the back of further momentum in Europe. By contrast, Akzo disappointed, reporting a fall in operating income while volumes and margins also fell short of expectations. Intertrust even went as far as issuing a profits warning in the week.

On Wednesday, ASMi revealed record sales ahead of forecasts, while operating result matched previous guidance. That said, prospects for its Asian activities disappointed and shares took a hit on the Hong Kong market. KPN’s results were fair: its market continues to be depressed but costs savings at the telecoms company still provide an ample cushion. Aalberts Industries reported results in line with our expectations, the good news being that organic growth is starting to pick up.

While its earnings per share (EPS) were in line, Anheuser-Busch InBev reported very strong organic growth ahead of expectations. On Thursday, Aperam disclosed disappointing numbers and less-than-encouraging prospects for the quarter ahead. In contrast, ArcelorMittal’s guidance was upbeat, as it expects steel demand to recover. Its second-quarter results dipped a tad below expectations. RELX posted results in line with expectations and achieved a tidy 4% organic revenue growth.

With results robust and better than expected, Royal Dutch/Shell remains on track to bolster its balance sheet, e.g. by way of disposals. Arcadis also revealed results ahead of forecasts but its surging share price was primarily attributable to improved and lower-than-expected debt levels. On Friday, Wolters Kluwer reported operating profit ahead of expectations but lagging organic revenue growth. At Euronext, solid profits were driven by better-than-expected revenues, while Flow Traders posted results in line with projections, a major improvement on its first-quarter showings.

Many more companies across the world released their corporate results in the week, with half of S&P500 companies now having reported. Bloomberg data shows that 77% of them improved earnings and 72% revenues. Europe’s performance has been less stellar. It’s not quite at its mid-point yet, but to date EuroStoxx600 companies have beaten earnings and revenue projections in 55% and 57% of cases respectively.

Refresco did more than report its results in the week: it announced a major takeover, as it is looking to bag Cott’s bottling operations for a consideration of USD 1.25 billion and so create the largest independent bottling player in Europe and the United States. Although the takeover will be debt-financed, the plan is to issue shares at a later date.

Silly season? Anything but

In terms of news, the week ahead will be anything but dull, as the second-quarter results season is nearing its peak and the first week of the month typically spells a busy macroeconomic schedule. 

The lengthy line-up for the week ahead includes the likes of Heineken, HSBC and Sanofi on Monday. Results for DSM, Grandvision, Apple, Devon Energy, Pfizer and BP are due out on Tuesday, while Wednesday will see ING, Vastned Retail, Societe General, Commerzbank, Standard Chartered and Rio Tinto reporting. On Thursday it’s the turn of Fugro, Adidas, BMW, Siemens, Continental, Allergan, Crédit Agricole and AXA, with RBS and Berkshire Hathaway wrapping up the week on Friday.

ABN AMRO is holding out for slightly improved Q2 volume trends for Heineken when compared with Q1 2017 (+0.6%), with European volumes set to benefit from the year’s Easter sales. For the Americas, volumes in Mexico are solid and improving, while the US and Brazil are facing challenging conditions, and Asia should see growth pick up. We’re putting its EPS at EUR 1.75, compared with a consensus of EUR 1.82, and expect a reiteration of its full-year guidance.

ABN AMRO’s take on DSM matches market expectations of revenue growth at 7% and operating profits (EBITDA) at EUR 354 million. The Nutrition division is projected to record the biggest advance in earnings (+8%), followed by Materials (+4%). DSM is expected to repeat its guidance for full 2017. 

The markets are looking for USD 45 billion in revenues at Apple in the second quarter, on sales of 40 million iPhones. Their attention will mostly be trained on developments in China and revenue guidance for September, the latter to ascertain any iPhone 8 delays (as rumoured earlier).

ABN AMRO expects Dutch bank ING to have had a good second quarter, with healthy underlying profit of EUR 1.33 billion, 4% lending growth and a capital ratio at 14.6%. Macroeconomically, the first week of the month always showcases business confidence (PMI) and US employment data. Chinese manufacturing confidence is expected to fall marginally in July, to 51.5. Monday should also see the release of inflation data for the eurozone, with July expected to come in at 1.2% annualised, compared with 1.3% in June. 

The final manufacturing PMI for the eurozone is due out on Tuesday, and is expected to clock in at 56.8. Later that day, the ISM manufacturing index will be released in the United States. This confidence indicator for the manufacturing industry is predicted to have fallen to 56.2 from 57.8.

Wednesday should bring a first glimpse of the state of play in the US jobs market in the shape of the ADP employment report. The markets are forecasting a July uptick of 195,000 jobs. On Thursday, many countries will report confidence in the services sector. The eurozone is expected to come in at 55.4 in July, while the ISM non-manufacturing index in the US is forecast to come down to 56.8 from 57.4. On Friday, all eyes will be on US non-farm payrolls, with the markets looking out for 183,000 new jobs in July and a drop in the unemployment rate, from 4.4% to 4.3%.

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