Jay to succeed Janet early in 2018

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On Thursday, President Trump announced that, in February 2018, 64-year-old Jerome (Jay) Powell will take the baton from Janet Yellen as chair of the US Federal Reserve. In the United Kingdom, the Bank of England raised its benchmark rate for the first time in more than a decade.

Like Europe’s other stock indices, the Amsterdam gauge had a good week, once again driven by both corporate results and the news from central banks. Ben Steinebach Head of Investment Strategy

Powell’s appointment is generally considered a continuity choice. With degrees in law and politics, he was appointed to the Fed’s Board of Governors by Barack Obama in December 2011 after a career in public service as well as on Wall Street, and was reappointed in 2014 until 2028. He’s unlikely to make any major changes to the normalisation of the extremely accommodating monetary policies that his predecessors Ben Bernanke and Janet Yellen embarked on. However, he’s an unknown quantity when it comes to his actions in challenging and exciting times. His predecessors were known for taking the bull by the horns and going out on a limb if they had to: towards the end of the 1970s, Paul Volcker introduced draconian interest rate hikes to rein in distortingly high inflation expectations; Alan Greenspan flooded the financial markets with massive money flows when the technology bubble burst and the world was shaken by terrorist attacks in 2001; Ben Bernanke grasped the nettle and launched a monetary experiment (QE) when markets were paralysed and the financial system was teetering on the verge of collapse; and Janet Yellen has navigated the final stages of normalisation in a very calm and controlled manner. To date, Powell’s track record reveals only that he’s generally voted in sync with the majority on the monetary committee, and the question is whether he’s able to set a new vision if so required.

On Wednesday, a day before Powell’s appointment, the Federal Open Markets Committee (FOMC) announced that interest rates would remain unchanged in their 1-1.25% range, but kept ajar the door to a rate hike inspired by the December FOMC meeting. The Federal Reserve will continue to shrink its balance sheet by not reinvesting bonds that mature (USD 10 billion a month, rising to USD 50 billion). In the UK, by contrast, the Bank of England moved on base rates – up to 0.5% from 0.25% – to rein in inflation, already at 3%. UK inflation is fuelled by higher import prices in the wake of a lower post-referendum currency. Sterling, incidentally, edged down slightly on the rate hike. In Japan, the Bank of Japan resolved to aggressively continue its expansive monetary policies.

Robust eurozone figures

The economic picture remains supportive of global financial markets. Economic sentiment in the eurozone has reached its highest levels since 2000, and purchasing manager sentiment in manufacturing also suggests continued growth in most countries. 

Global financial markets had another good week: equity market prices were generally up and bond market yields slightly down. Equity markets were supported by favourable macroeconomic news from both the US and the eurozone. October data on purchasing manager sentiment in manufacturing, released in the week, were rock-solid without exception, either rising from high levels or stabilising where they were plenty high to begin with (in Germany, for instance).

In the United States, consumer confidence (Conference Board) nudged its highest level since 2000, at 125.9 for October. The Republican Party presented their version of the tax plan in the House of Representatives, scrapping a range of – politically sensitive – tax deductions in addition to tax cuts already proposed by President Trump. With lower taxes not sufficiently offset by expenditure cuts, the US might run into difficulties when negotiating the debt ceiling in the run-up to Christmas.

Just like Germany’s Ifo index before it, the eurozone’s Economic Sentiment Index recorded further gains in October and reached its highest level since 2000. Yields across the world’s bond markets came down further in the week that was, most strongly so in Europe’s periphery, where investors shrugged off the turmoil in Catalonia. Spreads vis-à-vis Germany narrowed further in Spain, Portugal and Italy, the latter benefiting from an improved bond credit rating issued by S&P. Italy’s debt is falling in keeping with its targets, the country is dealing satisfactorily with its banking problem, and its new Rosatellum election law bill was passed, making it harder for populist parties to make it into governing coalitions.

AEX index confidently eyes further gains

Like Europe’s other stock indices, the Amsterdam gauge had a good week, once again driven by both corporate results and the news from central banks. 

The AEX added 1% and now stands at 555, its highest level this year. Fugro kicked off the week with a set of disappointing numbers. Its Land division was looking at a challenging comparison base with some regions facing shrinking activity, while Marine was bogged down by one-offs. ASM International reported results slightly ahead of expectations despite weaker gross margins. Its guidance on the fourth quarter was also at the top end of expectations. In addition, its sale of 9% of its stake in ASM Pacific Technology fanned takeover rumours again.

Trading updates issued by both Heijmans and Wolters Kluwer struck a positive note, while TKH’s was rather more mixed: impressive organic revenue growth and better-than-expected net profits but a cautious outlook. Basic Fit continued to enjoy steep growth in terms of both member and gym numbers, but its results and guidance were in line with expectations. Once again, DSM’s quarterly results beat forecasts, with both its Nutrition and Materials divisions contributing. The chemicals company reiterated its full-year guidance. 

ING’s results roughly matched expectations, with non-performing loan losses below guidance and organic loan growth very high at an annualised 5.6%. Shell’s figures were slightly better than expected, thanks in the main to its Downstream division. It’s particularly encouraging to see that, with oil prices at USD 52, Shell is still able to generate sufficient cash flows to propose a full cash dividend.

Other news in the Netherlands included Akzo’s play for Axalta, the coating systems maker, which should be construed as a step to build Akzo’s defences against PPG.

Across the world, too, companies released a veritable deluge of results, the most notable among them the robust figures at Mondelez and Allergan. Merck’s shares were hit by the news that it has been compelled to pull its application for one of its cancer drugs, while Teva Pharmaceutical fell off a cliff after posting disappointing numbers. Qualcomm’s results improved, but its dispute with Apple caused investors to take a dim view. Tesla suffered greater losses than had been expected as it’s taking longer to mass produce its Model 3. Facebook’s figures were very strong, but management observations about rising costs hit its future profits outlook. Lastly, Apple again caught out the markets with very robust figures that were way ahead of expectations and broadly based across its products and services.

Results season chugging happily along (photo BWM)

The US results train is slowly reaching the end of the line, but its European counterpart still has a way to go in the week ahead. Macroeconomic news promises lots of data on industrial output and inflation, and little from central banks. 

Dutch names to release results next week are Vopak, PostNL, Ahold Delhaize, ABN AMRO, Intertrust, Aegon, Refresco, Boskalis and Eurocommercial Properties. On the world stage, reporting companies include Priceline.com, Iberdrola, Emerson Electric, Adecco, BMW, Snap, Crédit Agricole, E. ON, Vestas Wind Systems, Walt Disney, Commerzbank, Adidas, Siemens, Continental, Merck and Allianz. Expedia’s figures disappointed and the markets are holding out to see how Priceline.com has done. The company has cut down on its advertising, which may boost earnings per share (EPS) but could prove a drag on future quarterly results. Priceline.com is less exposed to areas afflicted by the hurricanes, but their impact is still likely to be felt. The US is otherwise stable, while Europe is riding a hotel accommodation upturn. The markets are predicting revenues at USD 4.3 billion and EPS at USD 34.39, and will closely scrutinise guidance on the next quarter.

The markets are assuming Ahold-Delhaize to have had a robust quarter, with analysts focusing on price trends (is price deflation in the US finally over and done with?). And the final word hasn’t been spoken on how Ahold-Delhaize will head off competition in the US, not just from Amazon’s Whole Foods but also from Lidl and Aldi. Also important will be whether the Ahold and Delhaize integration is proceeding on schedule.

Earnings growth at Siemens is likely to lose some of its momentum as costs are rising, orders are falling and the comparison base is challenging. Higher costs reflect integration expenses related to acquisitions and growing spending to turn the business into a ‘digital factory’, and the company’s Healthcare division will have to serve as the stability factor in the figures.

In the macroeconomic arena, many countries in Europe are due to release their industrial production figures for September, e.g. Germany – which will also post its order numbers – France, Italy, the Netherlands and the UK. Inflation figures for October are due out for the EU and China, with the latter also slated to publish fresh data on foreign trade (also for October). Retail sales will also be interesting (September figures due out for the EU) while the United States is expecting new data on oil inventories, which turned out to be lower than expected in September and contributed to higher oil prices. 

But first, this Friday afternoon will bring the latest on employment and unemployment in the United States. By the time you read this, you will know what the October figures are and whether they have indeed staged the major uptick we predicted (partly to make up for September).


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