Markets euphoric over Macron win

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Emmanuel Macron’s victory (runner-up: Marine Le Pen) in the first round of France’s presidential elections caused euphoria in the equity markets. Another focus was President Trump’s proposed tax plan.

The European Central Bank met in the week and revealed a slight shift towards a more balanced view on economic and inflation prospects. Ben Steinebach Ben Steinebach Head of Investment Strategy

Gone are market fears of two populist, euro-sceptic candidates – left-wing Mélenchon and right-wing Le Pen – facing off on 7 May, and polls suggest a highly likely victory for Macron on the day. 

The French equity market gained well over 4% on Monday and Europe’s other equity markets followed at some slight remove, e.g. DAX (3.4%) and AEX (2.25%). Ten-year yield spreads between France and Germany narrowed from 63 to 46 basis points, reflecting a slight rise in German yields and a drop in their French counterparts.

In the United States, President Trump’s much-awaited tax plan was unveiled on Wednesday by Treasury Secretary Steven Mnuchin and White House chief economic advisor Gary Cohn. The plan envisages a simplification in income taxes – from seven to three tax bands, with rates reduced to 35%, 25% and 15%, while doubling the standard deduction to around USD 12,000 per person. The corporate tax rate is to be cut to 15% from 39.5% and will be levied on more (smaller) companies, the idea being that these measures will generate additional growth and so boost net tax receipts. However, this idea, which is credited to Arthur Laffer, failed to produce the desired result in the past (under Ronald Reagan, for instance). Consequently, US government debt is likely to shoot up, unless Congress significantly waters down the proposals, and even many Republicans reckon the plan goes way too far.

The European Central Bank met in the week and revealed a slight shift towards a more balanced view on economic and inflation prospects. Next month may bring more news about the timing and degree to which the ECB will taper its asset purchase programme. We don’t expect this to happen until 2018.>

AEX needs a Monday only

The AEX index had an excellent week, all of which was due to Monday’s crop of facts and figures. We’re smack in the middle of the results season and things are looking very bright, with many companies reporting results ahead of expectations. 

The Amsterdam gauge added nearly 2% in the week and is now at around the 522 mark, complementing Europe’s euphoria over the first round in France’s elections. The markets biggest gainers were Altice (+10%), ABN AMRO (+5%), ING (+5%) and Philips (+4%). Gemalto took the biggest absolute hit (-10%), followed by Galapagos (-1%) and KPN (-1%).

Philips’s figures cheered the Dutch market. Results for the HealthTech division were a bit mixed, but Personal Health served as the expected driver of better-than-predicted results. Lighting also did well and had reported earlier. Philips reiterated its outlook for both 2017 and the medium term.

Temporary employment agency Randstad also posted results ahead of expectations, doing even better than the robust growth the market had been looking for. Its margins improved in all countries it serves, North America excepted. That’s quite a feat, as the company is facing pricing pressures. Randstad predicted growth in April at the same levels.

KPN released a reasonable update, with revenues down in keeping with expectations. The company stood by its previous full-year predictions. Lastly, the Dutch market saw BinckBank’s results come in as expected.

In the international arena, investors were pleased with the results released by McDonald’s, Caterpillar, Amazon, DuPont, Biogen and Alphabet, whereas Microsoft and US Steel disappointed. Novartis’s figures were in line with expectations.

Of course, Akzo made the headlines again in the week, as PPG upped its bid to EUR 96.75 per share. Akzo has said it will take a long, hard look at the offer, which is a lot more than the previous bids it dismissed out of hand. JAB, finally, has slapped a ‘For Sale’ sign on its luxury footwear brands Jimmy Choo and Bally International.

Focus on Shell capex

The reporting season will continue apace in the week ahead, with blue chips such as Apple and Shell leading the headlines. The macroeconomic calendar looks promising, too, with US employment to round off the week. 

A small selection of the long list of companies slated to release their results: DSM, Shell, THK Groep, Mastercard, BP, Pfizer, Apple, Facebook, Gilead Sciences, Volkswagen, BNP Paribas, HSBC, Anheuser-Busch Inbev, Adidas, BMW and Siemens.

Chemical player DSM is scheduled to release its results on Tuesday. The markets are looking for a set of fine growth figures and operating profit of EUR 328 million (+11% annualised). The Nutrition division is projected to post double-digit growth on the back of costs savings and DSM benefiting from higher prices for vitamins A and E. Performance Materials should notch up operating profit of around 6%. In addition, the markets expect DSM to repeat its earlier projections for full 2017 and are assuming operating profit growth of 7% for the year.

Apple will report its second-quarter figures after closing on Tuesday. Investors will be particularly interested to see whether annualised iPhone sales are up or down. Another area of interest is China: are Apple’s Chinese sales on the mend and can it return to growth going forward? The question that also begs an answer is to what extent margins are being squeezed by the dollar’s strength and rising costs. And, of course, markets will want to hear about the outlook for the next quarter, while they’re already preoccupied with 2018 and the launch of the iPhone 8 in three different size models.

On Thursday, Shell will issue a pre-market results release. With oil prices relatively low, its focus is likely to remain firmly on cost savings and disposals to lick its balance sheet into shape. Last quarter, free cash flows were good and these look set to improve this quarter – an important prerequisite for dividend payments. That said, some analysts feel that Shell’s capital spending is inadequate for future growth.

On the macroeconomic front, investors will be looking out for final figures on purchasing managers’ sentiment in many countries. The eurozone index is high at 56-57, for both manufacturing and services industries, and provisional figures suggested an uptick on March.

On 2 and 3 May, the Federal Reserve’s Open Markets Committee (FOMC) will convene to discuss interest rates. We expect no interest rate changes but the Committee might provide some idea of the timing of the balance sheet reduction. The week will also see the European Union release the latest retail sales figures for March, among a set of data that should tell us whether improved consumer confidence is actually showing up in greater consumer spending. Lastly, the week will end with the monthly figures for the US labour market (for April), due out on Friday. A disappointing March employment figure (98,000 more jobs) is predicted to be followed by an increase of around 200,000 jobs in April.

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