Draghi is the boss

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Man listens

All eyes were on the European Central Bank (ECB) this week, and the press conference that it gave on Thursday. Although any announcement by the ECB is sure to draw an attentive audience, this time the focus was not only on the new measures revealed.

Recent weeks had seen increasing numbers of reports of friction at the highest levels of the ECB Ben Steinebach Ben Steinebach Head of Investment Strategy

Recent weeks had seen increasing numbers of reports of friction at the highest levels of the ECB about economic stimulus measures, and some board members were said to be less than enamoured with President Mario Draghi’s autocratic management style. On Thursday, Draghi reminded the world who is boss at the ECB: he is. The ranks were closed, and by signing the introductory statement the decision-makers showed that they are united in their support of the measures for boosting economic growth. And the ECB is willing to go to considerable lengths to achieve that growth: additional measures will follow if Europe’s economic growth falls short or if the projected inflation shrinks further. The ECB’s balance sheet will be strengthened by approximately 1,000 billion euros, and the possibility exists that the scope of the purchase programme will be expanded. The financial markets responded briefly with a minor increase in interest rates. These quickly fell back to former levels, however.

Interest rates in the United States climbed slightly this week, buoyed by encouraging macro data: healthy economic growth in the US will give the US Federal Reserve the opportunity to raise interest rates. Another factor, following the Japanese central bank’s decision last week to significantly expand the scope of its stimulus measures, is that the pressure on interest rates in Japan is causing major Japanese investors to look abroad.

Further recovery of the markets

News about macro data was mixed this week. In the United States, business confidence data and the purchasing managers index were encouraging. On Wednesday payroll processor ADP announced that 230,000 new jobs had been created in the past month, rather than the projected 220,000. Germany, though, announced some disappointing data. Both industrial output and factory orders showed modest improvements during September; demand had been expected to recover more rapidly following the August holiday period. However, these macro data were unable to depress the positive sentiment on the markets, which carried over the recovery that had begun last week.

In the US, the Republicans recorded a victory in the elections for Congress. President Obama now faces Republican majorities in both the House of Representatives and the Senate. This will seriously hamper him in the implementation of his policies. Leading stock indexes S&P500 and Dow Jones Industrial peaked at new record levels. Japan’s Nikkei Index also reached its highest point in five years this week. Markets in Europe also climbed, though no records were broken here. Although we expect that the markets might remain nervous for some weeks more, we believe that their recent volatility is a mid-cycle correction rather than a sign that the stock market climb that began in 2009 is coming to an end.

Q3 data and a downgrade

More corporate news was announced this week, though most of it concerned smaller and medium-sized companies. Among the major large caps, DSM and ING announced their results last week. DSM’s results were received favourably by analysts, despite a 10% fall in net earnings in Q3. Turnover had increased by over 5%, though, and the company announced that it anticipates that it will meet the market’s expectations this year. This had a positive effect on the stock price, which climbed 3%. ING announced Q3 data that were better than foreseen, thanks to solid net interest income and a further drop in the allowance for bad debts. The results of construction companies Heijmans and BAM, among others, were also announced this week. BAM’s results were favourable, while Heijmans issued a profit warning and saw almost 14% of its market value evaporate.

On Tuesday night, credit rating agency Standard & Poor’s announced that it had downgraded Rabobank Netherlands from AA- to A+. This downgrade is part of a more general downward trend on S&P’s part: it expects to further downgrade the ratings of all major commercial Dutch banks before year-end 2015. The downgrade drew barely any response from the market. In our view, Rabobank is still one of the soundest banks in the Netherlands.

The coming week we look forward to the results of Aegon, Ahold, Vodafone and others.

Macroeconomic news will include retail sales in the United States and consumer price index figures from China. However, the first news will be Friday’s report on employment in the United States.

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