Markets calm after missile strike

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Oil and gold were the only markets showing any response to the American attack, with North Sea Brent Crude again breaching USD 55.50 a barrel, while gold added around 1% to USD 1,263.50 per troy ounce. As we write, the US equity markets have been unable to respond to the attack, but the markets in Asia stayed unruffled.

The US missile strike on a Syrian airbase failed to stir the financial markets. Ben Steinebach Ben Steinebach Head of Investment Strategy

Today (Friday), investor eyes will be trained on the March jobs report due out at 2.30 pm. Exact jobs numbers are not yet known as we write, but Wednesday’s data released by pay check processor ADP suggest strong employment growth (263,000 jobs). The week was generally positive in macroeconomic terms, throwing up relatively strong European retail sales growth for February (0.7%) while Germany reported a satisfactory increase in industrial orders (3.4%) and industrial production rising by 2.2%, matching the percentage for January. In the United States, fourth-quarter 2016 GDP growth was revised upwards to 2.1% from 1.9% (annualised).

Fed to shrink balance sheet

The FOMC minutes suggest that the Federal Reserve expects the economy and labour markets to keep growing sufficiently for it to tighten policies further. 2018 will likely see it start shrinking its balance sheet, which has greatly expanded in the wake of consecutive asset purchase programmes. To date, maturing bonds have been replaced with new ones, keeping the balance sheet unchanged. As a result, the Federal Reserve should become a less dominant player in the bond markets, though this will happen very gradually, giving markets time to get used to the new normal.

The ECB, by contrast, is still a long way off this stage, as its minutes reveal. Its key focus right now is inflation, which slid to 1.5% in March from its 2% showing in February. Although partly attributable to low oil prices in February 2016 (comparative base), fears persist that inflation has further to fall. The ECB therefore remains poised to further expand its asset purchase programme. Bond yields were down across the board, partly because of lower inflation pressures and partly because Donald Trump’s reflation policies are now thought to be less robust than had been previously assumed.

Flat week in Amsterdam

Amsterdam’s main index currently stands at the 515 mark. The week’s biggest losers were Altice, NN, Ahold-Delhaize, Aegon, ArcelorMittal and Randstad, all hit by nearly 3% or more. Insurers came under pressure as the notional interest rates used to calculate their liabilities are being reduced. Lower notional interest rates imply higher liabilities and weaker capital ratios. The list of gainers was headed up by SBM Offshore, followed by Galapagos, Shell and AKZO Nobel. Gains varied from nearly 2% to 3%.

Both Unilever and AKZO were very much in the headlines in the week. As expected, Unilever announced the sale of its spreads division, which includes butters and margarines. The Food and Refreshment divisions are being merged, which may be construed as opening the door to a future spin-off. The consumer goods giant also plans to accelerate cost savings and is to embark on a EUR 5 billion share-buyback programme.

Meanwhile, PPG is turning up the pressure on AKZO to get the company to the negotiating table, claiming that 97% of its biggest shareholders want it to talk to PPG. AKZO’s CEO has responded that it isn’t his job to help PPG improve the conditions of a proposed takeover. PPG looks poised to make a formal bid; its deadline is 1 June 2017.

Other Dutch company news included the Dutch state reducing its stake in a.s.r. to 37.5% by selling off 20 million shares. Boskalis landed a dredging order in India, a fresh one in a series of multiple new orders that suggest an improving outlook for this division. The company’s other two divisions – offshore energy and towage – have yet to pull off the same feat.

The week’s M&A news included rumours that Philips is eyeing Italy’s Esaote, which manufactures diagnostic ultrasound and MRI systems and probes, and which might be a good fit for the company’s Healthcare division. Reckitt Benckiser, known as the maker of Durex condoms, is considering hiving off its food division, which makes ketchup and French mustard among other things, as it is not a core activity. Lastly, China’s ChemChina received the go-ahead from both the US and EU competition authorities to take over Syngenta. With proposed deals between DowChemical and DuPont, as well as Monsanto and Bayer, still in the pipeline, the agrochemical and seed industries are right in the middle of a major consolidation wave.

Car sales in the United States on the whole disappointed in March and recorded net falls. Though it was not particularly newsworthy, market watchers made much of the fact that Tesla’s market capitalisation now exceeds that of Ford.

Results season about to kick off

The week’s inflation numbers (for March) will come from the US, the UK, China, Japan, Germany, France and Italy. These will mostly be the final figures and are unlikely to stray too far from the – rather low – provisional figures released over the past few weeks.

More interestingly, China will release data on economic growth and international trade for both the first quarter and the month of March, while the United States is scheduled to post its March retail sales figures. In addition, February industrial production numbers are due out for Italy and the European Union as a whole, and we’re particularly keen to see if these will follow the favourable trend in Germany. In the United States, the University of Michigan will publish provisional consumer confidence readings for April. And new figures from the Zentrum für Europäische Wirtshaftsforschung (ZEW) for the same month will capture investment appetite in both Germany and the eurozone.

The week ahead will set in motion the first-quarter corporate results season. As usual, the American banking majors will kick things off, with the calendar featuring JPMorgan Chase, Wells Fargo and Citigroup. The underlying picture generally looks robust for America’s big merchant banks. The markets expect lending to edge down, trading in bonds to continue to achieve healthy levels, equity trading to dip and interest margins to perk up a tad. In terms of earnings, the quarter is expected to bring a fall but a comfortable annualised uptick. Sentiment may take a positive or negative turn depending on management predicting expected improvement in the earnings outlook or the yield curve flattening further.

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