Yellen has greatest impact

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This past week was awash with significant events, but most failed to fuel prices across the world’s financial markets. Only a speech by Federal Reserve Chair Janet Yellen benefited European equity markets – by pushing down the euro.

The AEX had a spring in its step in the week and notched up a performance ahead of most other European stock markets, even if there wasn’t much exciting corporate news to go around. Ben Steinebach Head of Investment Strategy

Yellen drove home the point that it would be inappropriate to keep the federal funds rate unchanged as the US economy is recording solid growth. She expects inflation to pick up over time and to no longer stand in the way of further policy normalisation. The markets responded by pushing up yields as well as the US dollar relative to the euro – encouraging news for European equity markets, which also happened to notch up greater share price gains than their US counterparts.

Yields also edged up in Europe, particularly in the periphery where concerns are growing over the referendum in Catalonia at the weekend. Germany’s election has so far made little impact on the financial markets. Its result has changed the political landscape, though, and it won’t be as easy to agree a coalition government as it used to be. A Merkel-run government bringing together the CDU/CSU and the rather more eurosceptic FDP and Greens is likely to be less Europe-minded and encouraging of Emmanuel Macron’s aspirations and vision. The French president presented his big speech on the future of Europe in the week, and would no doubt have preferred Angela Merkel to emerge from the elections in a stronger position. Macron urged greater collaboration in areas such as security and a joint intervention force, while looking for institutional innovation and a bigger budget for the EU, as well as a joint finance minister and an EU-wide financial transaction tax. Responses to his speech varied.

US budget plan losing the battle

The week saw geopolitical tensions over North Korea’s nuclear plans dissipate somewhat, and volatility across the world’s equity markets decline as a result. President Trump’s tax plan did not really surprise, but still has a long way to go before it’s a reality. 

Geopolitical tensions may flare back up at any moment, but the financial markets obviously had other things on their minds this past week, most of which we’ve touched on above. In addition, the US government finally released its long-awaited tax plan, which didn’t spring too many surprises – especially since it’s rather short on detail. Corporation tax is set to be slashed to 20% from 35% and income tax brackets will be reduced from seven to three, at rates of 12%, 25% and 35%. Importantly, taxpayers will want to know what happens to the tax base, i.e. the income and earnings components on which taxes are due, as this will make all the difference, while also pretty much deciding the impact of the tax cuts on the general government budget. The US budget is under a lot of pressure as it is, and government debt looks set to go through the roof even without the new plan. Be prepared for a great deal of resistance from the Democrats, while many Republicans are unlikely to welcome any deterioration in the country’s financial health.

Economic figures released in the week were generally positive and confirm the currently favourable picture of economic conditions. Particularly noteworthy was the September reading on the European Economic Sentiment Indicator, which came in at its highest in a decade.

Good week for the AEX

The AEX had a spring in its step in the week and notched up a performance ahead of most other European stock markets, even if there wasn’t much exciting corporate news to go around. 

The Amsterdam gauge added 1.25% and now stands at around 535. The country’s blue chips ASML and Royal Dutch/Shell – which between them account for over a quarter of the index – drove the advance by rising over 3%. ASML was up in the slipstream of the excellent results reported by Micron Technology. The US company issued greatly improved guidance and said it is planning a major investment drive – which is where ASML stands to benefit. No such specific company news boosted Shell, but oil prices did rise further in the week. Brent is currently trading at USD 57.50 a barrel, with WTI going for USD 51.60. In a separate development, DSM’s CEO said he expected this year’s disposals to rake in EUR 1.5 billion, which will then be put towards acquisitions.

At the international end, Alstom and Siemens agreed on merging their train operations; Nestle said it will be focusing on coffee, bottled water, animal food and care; Nike’s earnings exceeded expectations; and H&M’s results had a poor reception from investors.

News-lite week ahead

Unlike the deluge of political and macroeconomic news in the week just past, the week ahead should be quieter. The first batch of third-quarter corporate news isn’t due out for a week or two, but a couple of interesting figures are scheduled for release in the macroeconomic arena. 

First off, we’ll have to wait and see if tensions will mount in Catalonia this weekend and spark upward yield effects in Europe’s periphery. The week’s agenda features a gaggle of reporting companies whose financial year doesn’t match the calendar year: Lennar, Monsanto, Tesco and Pepsico will release quarterly figures. The proposed Bayer/Monsanto deal may still be under scrutiny from the regulators, but the markets are increasingly assuming it will go ahead, and Monsanto’s share price of USD 120 is creeping ever closer to Bayer’s bid of USD 128. Monsanto’s results, then, don’t matter so in the scheme of things, all the more so because the company locks in virtually all of its earnings between the end of February and May.

Pepsico’s earnings per share should come in at USD 1.43, the markets reckon. Its organic revenue growth in North America will be hampered by a challenging comparison with excellent figures for last year. Investors also want to find out if anything’s changed in North American consumer behaviour, as this tends to be dynamic and the soft drinks business appears to be losing market share. Markets will also be looking for information about the impact of hurricanes and earthquakes in the United States, Mexico and the Caribbean. 

The week’s main news is likely to be macroeconomic: as it does every new quarter, Japan will release its Tankan report, which gives an idea of prospects for corporate Japan. Meanwhile, a great many countries will publish their final figures for purchasing manager sentiment. These shouldn’t differ too much from the provisional figures as published earlier, and are unlikely to make a great splash in the markets.

Also due out are retails sales figures for August in the European Union, while Germany and the US will publish new industrial order figures for August, typically a solid gauge of future activity in the sector. The ECB will have its monthly monetary policy-making meeting on Thursday, while the Americans will release their September jobs and unemployment figures. The financial markets are always keen to know the lie of the employment land, as these data help inform the Federal Reserve’s policies.

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