Trump charts protectionist course and global yields rise

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At his inauguration, America’s new president Donald Trump doubled down on his protectionist message – and he lived up to his words in the first week of his presidency. The equity markets were unmoved and the Dow Jones hit the 20,000 mark. Bond prices fell across the world.

The AEX index ended the week virtually unchanged despite a full slate of corporate news showing robust results and prospects in line with expectations. Ben Steinebach Ben Steinebach Head of Investment Strategy

Trump’s tough words had barely died away before he killed off the putative Trans-Pacific Partnership at the stroke of a pen, the free trade deal being negotiated by numerous countries around the Pacific Ocean. Almost in the same breath, he said he was also looking to end NAFTA, America’s treaty with Canada and Mexico, and stop negotiating TTIP. Likewise, his wall – or fence – on the border with Mexico will get built and companies manufacturing – or continuing to manufacture – outside the United States will be slapped with high import fees. The tone has been set.

The equity markets shrugged it off and seemed to think Trump will gradually come around, while the bond markets are rather more taken with the increased government spending the new president is planning for infrastructural investment. Resultant higher government debt would boost capital demand and push up yields. In the United States, ten-year government yields have nearly doubled in six months’ time and now top 2.5%, even if last week’s increase of five basis points was rather modest in the circumstances. Although yields are much lower in most European countries, they recorded a much steeper advance in the past week than their US counterparts. Whereas Germany, the Netherlands and Spain saw an uptick of only 10-15 basis points, France (20 basis points) and the other southern European countries witnessed much larger increases of 30 basis points and over. Meanwhile, Greece is again at loggerheads with the European Union over the latest tranche of its aid programme, Italy is back to talking constitutional reform and in France the presidential candidates are jockeying for position. All of which increases political risk and pushes up yields even further.

Macroeconomic picture remains generally good

The week that was saw economic indicators released that ranged from encouraging to solid, with the odd exception. Data about confidence in the European Union and Germany were positive while purchasing manager sentiment for the manufacturing industry even exceeded expectations in most countries, coming in comfortably ahead of the 50 mark that lies between growth and contraction. In the United States the same was true for the services industry, where preliminary figures suggest that purchasing manager sentiment rose to 55.1 in January from 53.9 in December. In the eurozone, by contrast, this same index fell short of expectations and edged down. The fall in Germany’s Ifo index, the country’s key gauge of business confidence, was also disappointing. A glimmer of hope shone across the Channel, where the United Kingdom posted somewhat higher economic growth for the fourth quarter (0.6% up on the third quarter and 2.2% ahead of the year-earlier figure). The equity markets took a generally positive view and share prices added an average 1.5-2% in the United States and a little less in Europe. However, the UK’s FTSE lost 0.5%, which was possibly down to the Supreme Court ruling that the UK government needs the go-ahead from the British parliament before triggering Article 50.

Results season in full swing, AEX flat

The AEX index ended the week virtually unchanged despite a full slate of corporate news showing robust results and prospects in line with expectations. In the United States, in particular, the results season is well under way, with over 200 S&P500 companies now having reported their numbers: 74% better-than-expected profits and 61% better-than-expected revenues. Historically, it has been a good season in terms of earnings, while revenues are in line with trends. Meanwhile, it’s perhaps too early to draw conclusions on Europe, where only rather more than 100 of the Stoxx600 have reported their results. That said, percentages are generally a little lower, but the overall picture is much the same as in the States.

In the Netherlands, Unilever was on the slate this past week. Organic sales growth disappointed, but earnings hit expectations on the back of higher margins. The company predicted challenging markets in the first half of 2017, as in the second half of 2016. Philips also reported disappointing figures, while the FDA has embarked on new investigations – potentially another nail in the company’s coffin after the Cleveland affair. Among the internet majors, both China’s Alibaba and Google (Alphabet) reported their numbers. China’s equivalent to Amazon revealed robust figures and annualised sales growth of no less than 54%, while also raising its outlook. At first blush, Google’s results appeared to disappoint somewhat, but that was mostly due to expectations running exceedingly high. In effect, its results were solid and displayed strong momentum.

Central banks to set the stage

What President Trump will do or say in the week ahead is unknown as we write. The calendar does show three central bank meetings – at the US Federal Reserve, the Bank of England and the Bank of Japan. In addition, many companies are poised to release their results for the fourth quarter of 2016. To start off with these corporate results, the coming week will be dominated by technology companies (Apple, Facebook, Amazon and Motorola), energy firms (Exxon Mobil, Chevron and a few smaller US players) and pharmaceuticals (Roche, Pfizer Eli Lilly, Merck & Co, Roche and Amgen). We are also looking forward to the results figures for Daimler, Siemens, Philip Morris, Colgate Palmolive and financial services companies Deutsche Bank, VISA and Mastercard. In the Netherlands, ING, Royal Dutch/Shell, KPN and Wereldhave are on the roster.

In the macroeconomic arena, we’ll see the final purchasing managers’ sentiment figures in addition to those central bank interest-rate meetings. Many European countries will publish their economic growth figures for the fourth quarter of 2016, while economic sentiment is due out for the European Union and retail sales for the EU, Germany and Japan. Lastly, there’ll be initial January inflation showings for Germany while the United States is set to release its monthly employment and jobless numbers on Friday. The Chinese market will be closed through 31 January for the Chinese New Year celebrations: the Year of the Rooster is about to start.

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