Macro news provides little direction

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Macroeconomic data failed to point the way in the past week. Data for exports and imports (E&I) as well as for industrial production (IP) generally disappointed in the countries that released them. It started in China, where E&I still enjoyed double-digit year-on-year growth at least, whereas Germany saw both sets of figures unexpectedly contract. IP dipped below forecasts in France as well, but beat expectations in both the United Kingdom and – particularly – Italy. It’s worth noting that IP numbers are known for being quite volatile and that it’s too early to draw conclusions based on a month of disappointing showings for production and export-oriented countries such as Germany and China.

Although the markets had brushed off North Korea’s blustering at the beginning of the week, Trump’s tweets and North Korea’s response mid-week sparked a flight from risky investments. Ben Steinebach Ben Steinebach Head of Investment Strategy

In the oil markets, US inventories again lagged way behind expectations in the week, while OPEC’s two biggest producers – Saudi Arabia and Iraq – promised to observe production constraints. This failed to stir oil prices, which stayed pretty much unchanged this week.

Geopolitical tensions back with a vengeance

Tensions between the US and North Korea fully heated up in the week and financial markets did take heed this time. 

Although the markets had brushed off North Korea’s blustering at the beginning of the week, Trump’s tweets and North Korea’s response mid-week sparked a flight from risky investments. Rex Tillerson sought to calm frayed nerves with a more diplomatic stance, but the president of the United States doubled down on his earlier threats. North Korea was unfazed and threatened to strike Guam.

The warlike rhetoric pushed equity indices sharply down: Europe lost between two and three per cent, Asia trailed not far behind , while losses in the United States rose to two per cent. At the same time, long yields fell, the gold price rose (+1.5%) and the US dollar added some strength against the euro.

Although geopolitical tensions have become an ever greater risk this year, the markets don’t believe they will mushroom into full escalation and nuclear war. That said, financial markets may turn very jittery at a time when it’s supremely important that the global economic recovery doesn’t get hit. For now, this belligerent language is thought to be President Trump’s way of getting China to wade in and put greater pressure on North Korea.

AEX swept along by adverse sentiment

The Amsterdam equity market gauge did slightly better than its counterparts in the rest of Europe. That said, its losses were still pretty steep: a tad over two per cent to 518. 

Geopolitical tensions aside, the week also saw plenty of corporate news. On Monday, PostNL had a mixed report for the markets: while its second-quarter figures were slightly ahead of expectations, the company noted that postal market regulation is picking up steam, taking its full-year results to the lower end of its previous range guidance. Ahold Delhaize’s results were solid, but markets were underwhelmed. Yet its operating income was slightly ahead of forecasts and it upped its guidance for expected merger synergies, while facing unexpected price inflation in the US.

SBM Offshore surprised on the upside. Granted, its revenue lagged expectations, but operating profit (EBITDA) was 14% up on what the markets had been holding out for. There were no negative surprises and the company raised its full-year guidance. Aegon reported earnings just slightly ahead of expectations, but its Dutch division’s capital ratio (Solvency 2) far exceeded projections, sparking a positive response in the markets. The week also saw the life insurer announce two disposals to strengthen its balance sheet. Soft drinks and fruit juice bottler Refresco reported high revenue and volume growth. However, its costs disappointed and ate into margins.

In the international arena, Priceline.com recorded improved earnings for the second quarter although its third-quarter earnings guidance disappointed. TripAdvisor also beat expectations, but was cautious in its outlook for the second half of the year. Walt Disney reported higher-than-expected income but its revenues were disappointing and the number of ESPN subscribers continued to fall. Disney announced it would pull its movies from Netflix and start its own streaming services. Losses at Snap, the parent company of Snapchat, were a bit heavier than expected, particularly as daily user numbers undershot forecasts.

A full schedule

A fair crop of companies are slated to post their results in the week to come and the macro diary is likewise nice and full. A selection of companies are scheduled to report next week: Actelion and RWE on Monday, TKH Group, Yahoo! and Home Depot on Tuesday, with Wednesday featuring Heijmans, Cisco Systems, Target and Tencent. Companies releasing their results on Thursday include NN Group, Boskalis, Vestas Wind Systems, Applied Materials, Ping An Insurance and Wal-Mart, while it’s the turn of Vopak, Brunel and Deere turn on Friday. 

ABN AMRO forecasts double-digit organic turnover growth (10.8%) for TKH in the first half, with its three divisions –Telecom Solutions, Building Solutions and Industrial Solutions – all contributing. This should add up to operating earnings growth (EBITA) rising by 22% to EUR 78.7 million. Management issues (typically conservative) guidance when releasing half-year figures.

NN’s release will include Delta Lloyd’s results for the first time, with ABN AMRO projecting operating result before tax of EUR 424 million and an improved capital ratio (Solvency 2) at 185%. Its cash position is expected to have contracted to EUR 1.4 billion from EUR 1.9 billion in the first quarter, in part because of capital being spent on Delta Lloyd’s life insurance business, because of equity buybacks and dividend payments.

Vopak is likely to struggle with a tough comparison: last year, the markets were holding out for rising oil prices (contango) and oil storage appeared a profitable strategy, while they currently assume that oil prices will fall (backwardation). The tank storage company has also been subject to adverse currency effects. ABN AMRO projects a fall in occupancy rates to 91%, fairly flat revenue trends (EUR 335 million) and earnings per share of EUR 0.57.

In terms of macroeconomic news, China will post its July retail sales and industrial production numbers on Monday, with the markets predicting year-on-year advances of 10.8% and 7.1% respectively. The same day should see the eurozone release its industrial production figures, which are expected to reveal a month-on-month drop of 0.4%. On Tuesday, the US will publish retail sales figures for July (0.4% month-on-month) while Wednesday will see the release of various housing figures and the minutes of the latest Federal Reserve meeting. On Thursday, retail sales numbers are due out for the United Kingdom (0.0%) and industrial production numbers for the US (0.3%). And lastly, US consumer confidence will be the highlight for Friday, as measured by the University of Michigan. The markets are looking for an increase in August to 94.0 from 93.4.

A fair number of countries will also publish their economic growth rates for the second quarter. Market forecasts are predicting annualised growth of 2.5% for Japan, 1.9% for Germany and 2.1% for the eurozone.

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