Financial markets increasingly nervous

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A number of disappointing economic trends met with a jittery investor response this past week, while trouble at Portugal´s Banco Espirito Santo did nothing to help steady nerves. Virtually all global equity markets recorded falls relative to the highs – all-time highs in one or two cases – notched up last week. Bond prices rose except in the eurozone periphery, as investors scurried for cover in the usual safe havens, but also because some economic data disappointed.

Virtually all global equity markets recorded falls relative to the highs – all-time highs in one or two cases – notched up last week. Ben Steinebach Ben Steinebach Head of Investment Strategy

Germany, for instance, saw its industrial production fall back in May (by nearly 2% on April), after reporting a significant slowdown in industrial orders just a week previously. Mario Draghi’s assurance that the ECB does not rule out an asset-purchasing programme for the eurozone has also helped push bond yields to historically low levels.

In the United States, the Federal Open Market Committee published its June meeting minutes, whose overall tone was dovish. It suggested interest rates in the United States will stay low for quite a while yet, once again boosting bond prices and putting downward pressure on US yields. The data from China was encouraging: inflation edged down to 2.3% in June compared with 2.5% in May.

Last week of course also saw the start of the results season: Alcoa kicked off as always, reporting better-than-expected results for the second quarter. The US aluminium producer also pleased the markets by noting that the demand for aluminium should increase by 7% this year.

Profit warnings coming thick and fast in Amsterdam

Across the world, equity markets recorded price falls in the past week, the AEX even more so than most in the wake of a gaggle of profit warnings that, funnily enough, seems to have struck the Amsterdam market only. Price losses in US stock markets were limited to 1-2%, possibly also because of the encouraging results and outlook released by Alcoa. The picture was a lot grimmer in Europe, where indices fell back, by 2.8% for the UK’s FTSE 100 to nearly 4% for France’s CAC 40 and the Netherlands’s AEX.

Amsterdam’s losses were down to profit warnings from the likes of Philips, BAM and Fugro. Philips warned of a second-quarter Healthcare division result dipping 15% below forecasts in the wake of currency headwinds, its Cleveland factory shutdown and subdued demand in both China and the United States. Philips’s share price did not move on the news, as the company announced immediate and decisive action.

BAM issued its second profit warning in 12 months and instantly saw its share price plunge by 30%. The construction group is facing budget overruns on two major projects in Germany and the United Kingdom, scheduled to be completed at the end of 2016 and 2015, respectively. And on Thursday, consultants Fugro warned of interim results not meeting expectations. Weakness in the oil and gas industry is squeezing all its businesses, but its Geoscience division is notably lagging. 

There were some pockets of good news to make up for all the doom and gloom. Unilever is selling its Slim-Fast business to private equity firm Kainos Capital for an undisclosed sum, but will retain a minority interest. Meanwhile, Nestlé also sold one of its businesses: Juicy Juice was pulling down Nestlé’s average margins and has been acquired by a buyout firm. PostNL announced that the outlook for 2014 is significantly better than expected and that the strong performance of the MailNL division in particular should ratchet up profits to €260-290 million, compared with the €180-220 million predicted previously. The AEX closed at 403.39 on Thursday, from 418.70 the Friday before.

Portuguese bank stirs up trouble in the bond markets

Bond yields may have come down across the world, but the eurozone periphery went the other way, as a large Portuguese bank, Banco Espirito Santo, rekindled painful memories by missing an interest payment. The lightning rod was an interest payment on a short-term loan to one of the holdings companies in which Santo has a € 1.2 billion holding. This minor incident needn’t have sparked a massive sell-off in the markets, but investors cannot be blamed for fearing that all kinds of crossholdings with other financial institutions – and the government itself – might set off another wave of trouble. Portuguese 10-year yields added almost 0.4 percentage point to nearly 4% in the week, dragging up yields in Spain and Italy in their wake, albeit slightly less: by over 0.1 percentage point. This was in contrast to the eurozone’s core countries, which recorded declines in ten-year yields – from 1.27% to 1.20% in Germany. In the United States, in fact, yields fell even a little bit faster, from 2.65% to 2.53% on the dovish wording of the FOMC minutes. The markets for corporate bonds were calm in the past week and prices hardly budged, though spreads over bonds edged up as a result of falling government yields.

Results season kicks off

This past week saw the start of the results season. Market focus will be firmly on corporate news in the next six weeks, though macroeconomic indicators will no doubt continue to set the general mood. First up to present their results are US investment banks Goldman Sachs and JP Morgan Chase, followed by pharmaceuticals companies Johnson & Johnson and Novartis. Profit figures of players such as Intel, IBM and General Electric are expected to give a good idea of the state of the US economy, while SAP and Ericsson will be next in Europe, as will ASML – and Sligro – from the Netherlands. Macroeconomic readings should bring final June consumer prices in Europe and industrial production in the EU and the United States. We’ll be looking out for confidence indicators: regional US business confidence in the shape of the Philly Fed, and consumer confidence in the United States and a number of European countries. US and Dutch retail sales should also tell us more about consumer behaviour, while China is slated to publish a first indication of economic growth on Wednesday morning.

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