May loses wider mandate

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Theresa May failed to obtain the wider mandate she envisaged with the UK parliamentary elections. Sterling lost ground. The UK economy will suffer from uncertainty for a prolonged period and will lag behind the continental economy.

In the long term, there is an increased risk that the Brexit negotiations will drag on longer and that the UK may even fail to reach agreement with the European Union. Ben Steinebach Ben Steinebach Head of Investment Strategy

The UK economy will suffer from uncertainty for a prolonged period and will lag behind the continental economy. The Conservative Party (presumably) lost 18 seats on Thursday, relinquishing its absolute majority in House of Commons. Prime Minister May failed to obtain the wider mandate she had envisaged in order to strengthen her position in the Brexit negotiations. Uncertainties, both short-term and long-term, have increased. In the short term, it will be extremely difficult to form a majority government, both on the right and on the left (where Labour did unexpectedly win 28 seats, yet would have trouble forming a majority government). May’s position is uncertain and she might even step down. In the long term, there is an increased risk that the Brexit negotiations will drag on longer and that the UK may even fail to reach agreement with the European Union.

Sterling lost more than 2% against both the euro and the dollar. Meanwhile, the eurozone economy is growing successfully, and growth in the first quarter of this year (compared with the fourth quarter of 2016) has been upwardly adjusted from 0.5% to 0.6%. The eurozone economy has been on a rising growth path since the second quarter of 2016. This is one reason why the European Central Bank (ECB) slightly revised the interest rate outlook on Thursday. Whereas it had so far indicated that interest rates would either remain at current levels or be lowered, a decrease is no longer being mentioned. 

The ECB also stated that its bond buying programme would continue to be pursued in full (until the end of this year). The financial markets were clearly in ‘wait and see’ mode last week. 10-year bond yields in Europe edged down, and most leading equity markets closed off Thursday slightly lower than the previous Friday. Testimony given by former FBI Director James Comey, who stated that President Trump had suggested suspending the investigation into Trump’s ties with Russia, did little to change that. Comey’s statements could cause problems for the US president in the long run.

AEX loses ground as well

Despite perking up slightly on Wednesday and Thursday, the AEX lost more than 0.5% compared with the previous Friday. Markets in the US lost a bit less than those in Europe, and the Nasdaq (technology index) even managed to gain ground. Now that the first-quarter results season has come to an end, there is very little corporate news. Still, there were a few interesting developments to report. This week, for the first time, a bank in Spain was rescued under the new European regulations. Banco Popular, which had been suffering from real estate losses and savings withdrawals, was acquired by Banco Santander for the symbolic amount of EUR 1. This wasn’t exactly a good deal, though, as Banco Popular’s bad loans accounted for almost 15% of its total credit volume. To absorb these losses, Santander will raise around EUR 7 billion in the market by means of a rights issue. Under the new regime, banks are no longer rescued by the state (with tax money); instead, investors are approached. The majority shareholders in this case are Germany’s Allianz and the French bank Credit Mutuel.

In pharmaceuticals, Roche, the market leader in anti-cancer drugs, had a setback. The patent for its successful breast cancer medication Herceptin will soon expire, opening the door to rivals offering cheaper alternatives. Roche tried to address this with a combination medicine (Herceptin with Perjeta), but test results disappointed. The company’s share price subsequently fell by 5.5%.

Apple held its developers’ conference last week, where it announced several software updates and new hardware. Among other things, the tech giant presented its own home robot (Bot). Apple is tackling competition from Amazon (Echo) and Google (Google Home) with its HomePod and also introduced its own payment service, which will compete with PayPal. China’s Alibaba, meanwhile, held two investor days last week. Alibaba, which runs an online platform for other web shops, raised its sales forecast to 45-49%, driven by its stronger focus on markets outside China and its enhanced offering of cloud services. Online shops benefit from the data they have access to through Alibaba. The company itself, meanwhile, does not need inventories or distribution centres (like Amazon does, for example). Alibaba’s share price rose 15% after the sales forecast was announced.

Macroeconomic data to dominate the coming week

Second-quarter results will only start trickling in around mid-July. However, the coming week will see a long list of macroeconomic data, the most important of which we discuss below. First, all eyes will be on the Federal Reserve’s policy-making committee. We expect the Fed to raise interest rates by 0.25%, despite the relatively weak job market figures announced last week. The US added ‘only’ 138,000 new jobs in May, and previously published numbers for March and April were downwardly adjusted by a total of 66,000 jobs. In addition, in the week ahead various countries will publish a remarkable number of ‘hard’ indicators – data on production, spending and the job market, for instance. New data on industrial production in April will be presented in the European Union, Italy, the United States and China; the latter will also announce new figures on investments and retail sales. 

The United States, the United Kingdom and the Netherlands will also publish retail sales data for April. Further announcements include new job market data from the European Union, the United Kingdom, France and the Netherlands, plus figures for new housing construction projects in the US in May. Few ‘soft’ data, i.e. confidence indicators, are scheduled for the coming week. The main ones are consumer confidence in the US (a first indication by the University of Michigan) and the Philadelphia Fed index, which reflects expected activity in the region around Philadelphia in June. And finally, Germany and the eurozone will publish data on investor sentiment in June (the ZEW index). The main attraction, though, will be the outcome of the first round of French parliamentary elections. If the polls prove to be accurate and Emmanuel Macron’s party (La Republique En Marche) wins an absolutely majority, Macron will have more of a chance of implementing his reform policy. This will presumably only become clear in the second round of elections on 18 June.


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