China's PMI spoils party

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Chinese lanterns China

The financial markets generally got off to a robust start this week, initially sustaining last week's high levels in the face of slightly disappointing macroeconomic data from China and Germany. December 2013 data on Chinese retail sales, industrial production and corporate investment were all a tad disappointing, as was gross domestic product in the fourth quarter, which at 7.7% grew a little more slowly than the 7.8% generally expected. The ZEW index, an indicator of investment sentiment in the German economy, also fell somewhat short of expectations in January and was in fact lower than in December.

So if concerns about global economic growth really were a major driver of last week’s sell-off, the market looks oversold to me. Ben Steinebach Ben Steinebach Head of Investment Strategy

The equity markets shrugged it all off and sustained their recent high levels. They took their cue from the Chinese central bank: it pumped more liquidity into the money markets to ease some of the increased strain and to create room for greater credit demand in the run-up to the Chinese New Year. However, when China’s industrial purchasing managers' index dipped just below 50 – the borderline between growth and contraction – on Thursday, equity markets in Asia dived, quickly followed by their counterparts in Europe and the United States, causing the week to end on a slight loss for most stock markets. We’d like to note here that China’s PMI is an HSBC product and that it tends to be less reliable than the index published by the Chinese government, or so we feel. That said, the solid PMI numbers in Europe were unable to turn the tide.

Corporate results in the Netherlands: mixed bag
In the Netherlands, last week’s corporate results were a mixed lot, with Anglo-Dutch blue chips Royal Dutch/Shell and Unilever at extreme ends of the spectrum. The mood had been set by last week’s Shell shocker, as the company warned of fourth-quarter earnings well below those recorded in previous quarters. Ahold also disappointed, mainly on a lagging sales performance at Albert Heijn, as both Bol.com and Albert.nl enjoyed a robust quarter. We’ve lowered our recommendation for Ahold from Buy to Hold.

By contrast, ASML posted results much in line with expectations, even if it struck a note of caution on the first quarter of 2014. Progress on the new EUV technology is encouraging, however, and ASML might well further expand its share of the market – already at around 80%.
Unilever’s figures exceeded forecasts, with lower-than-expected sales in developed countries more than offset by sales in the emerging economies, which showed underlying growth of 9%. Unilever did note that the strong euro might cut the sales figure to 5% this year, while DSM also cited currency effects: its operational results were robust, but its earnings had been completely wiped out by the strong euro. Of course, many Dutch companies hedge their currency exposures – they’d just underestimated the risk of an expensive euro.

All eyes trained on the Fed´s Janet Yellen
The week ahead will see the publication of a raft of macroeconomic data, but we expect corporate results to steal the limelight. Consumer confidence data are scheduled for release in many countries, including Germany, the United Kingdom, Italy, France, the whole of the eurozone and the United States – both the Conference Board and the University of Michigan.

Also, we're eagerly awaiting the outcome of next Wednesday's FOMC meeting on interest rates, from which we might hear further tapering news and which will see Janet Yellen appointed the next chairman of the Federal Reserve. Data to watch towards the end of the week include January inflation in Germany and the eurozone – potentially important for future ECB policies.

Corporate results to be released in the week include those for Philips and Royal Dutch/Shell in the Netherlands, and the latter company has of course set the stage with last week’s profits warning. Elsewhere, we’re taking an interest in Spain’s banks Santander and BBVA, not least in view of the ECB taking the pulse of Europe’s largest banks in its asset quality review as 2014 progresses. And big names such as Caterpillar, Pfizer, Novartis, Roche, Siemens, Ericsson, Chevron and LVMH will of course reveal to the markets how they did in the fourth quarter of 2013.

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