The sentiment on the international financial markets last week was once again characterised by risk aversion. Stock markets everywhere fell, while the bond markets showed minor gains once more, causing interest rates to drop slightly.
Both industrial orders and industrial output in August proved to have fallen much more than had been projected.
Ben Steinebach Head of Investment Strategy
The sentiment on the international financial markets last week was once again characterised by risk aversion. Stock markets everywhere fell, while the bond markets showed minor gains once more, causing interest rates to drop slightly. The chief cause for the pessimism lay in the failing outlook for the global economy. After the highly encouraging employment situation report from the United States (showing that employment had improved by 248,000 jobs) that had rounded off the previous week, disappointing data from Germany caused the mood to turn this week. Both industrial orders and industrial output in August proved to have fallen much more than had been projected. Although several causes can be identified, which will likely have an opposite effect starting September (carryover effect of the strong euro earlier in the year, tensions in Ukraine and a noticeable concentration of holidays in August), the drops caught the markets unawares.
Another factor came later in the week, with the slightly reduced estimates for the global economy for 2014 and 2015 published in the IMF’s semi-annual World Economic Outlook. Although the main cause underlying these reduced estimates was downward adjustments to the European growth rate, while the growth rate in the United States continues to exceed the trend, the sentiment on the US stock markets was also affected. Lastly, President Mario Draghi of the European Central Bank once more pointed out that the rate of growth in the eurozone is in danger of dropping. He called on the Member States to avert the risk of deflation by doing everything in their power to boost growth. These discouraging reports cancelled out the favourable mood caused by last week’s encouraging US employment situation report. Most markets closed on Thursday with losses ranging between 2% and 3.5%, with little difference evident between the United States and Europe. One exception was Hong Kong’s Hang Seng Index, which managed to make good the decline resulting from the previous week’s student protests. Although prices on the international bond markets changed little, yields fell slightly.
Rollercoaster ride for Imtech stock
Last week, as has become tradition, US company Alcoa kicked off the earnings season. A number of Dutch companies were also in the news, though mostly unfavourably. As a result the AEX was unable to avoid the international developments and on balance fell more than 2%. Aluminium producer Alcoa reported a surprising 7% increase in turnover for Q3, up to USD 6.2 billion, with earnings at USD 149 million. These favourable results could not balance out all the negative macroeconomic news, however, presumably because in the past Alcoa’s earnings have not always formed a reliable indicator for the remainder of the earnings season. Several companies were in the news on the Dutch market. The loss caused by the recent pilots’ strike caused Air France KLM to issue a profit warning of EUR 500 million midway through the week. Imtech announced a rights issue, which it hopes will raise EUR 600 million to reduce the company’s debt. On Wednesday the stock fell 15%, but on Thursday – when details about the issue were announced – a rollercoaster ride began. The relatively small number of outstanding shares compared with the 60 billion rights, which are similarly negotiable, created a scarcity that resulted in substantial price fluctuations. At one point the stock’s listing was in fact 2000% up. Another factor that might have played a part here was the possibility that investors would need to reverse their short positions (share purchases). BAM’s stock was one of the big losers last week. This company, which has already lost 50% of its value this year, announced a reorganisation that will cause 650 jobs to be lost. Lastly, Exact climbed 15% on Thursday, following the announcement that private equity APAX is seeking to acquire the company for EUR 32 per share.
Much determining news expected this week
The earnings season will pick up speed this week, mainly with companies from the United States. The macroeconomic side will also be somewhat busier than last week. Inflation data from the eurozone and its separate countries will draw particularly close attention. In the United States, most of the Q3 earnings that will be reported are those of some of the major banks (Goldman Sachs, JP Morgan Chase and American Express). In addition, General Electric’s results will likely be anticipated with great interest: as a rule this company’s earnings are seen as an accurate reflection of the US economy. Lastly, pharma company Johnson & Johnson and IT company Intel will be publishing their earnings this week. In Europe LVMH, manufacturer of luxury goods, and Swiss companies Roche and Nestlé will be the first European companies to present their Q3 earnings. ASML and Ziggo will kick off the season in the Netherlands this week.
In macroeconomic news, we look forward to September inflation data from the United Kingdom, but also and in particular from Italy and France in the eurozone. Confirmation is also expected of whether the 0.3% previously announced for the eurozone as a whole for September is final. Inflation data from China and the United States will be released. In addition, the ZWE index in the Germany and the eurozone will be published, showing how investors view the German and European economies. In view of the past week’s negative sentiment, this is certain to generate a great deal of interest, as will the data about August’s industrial output in the European Union (in light of Germany’s results) and the United States. Lastly, the first data about where the US economy stands in October will be released, in the form of the Philadelphia Fed Index.