In the past week little news came in that could give direction to financial markets, which might be the cause of their current relative tranquillity. The markets were still not quite over the disappointment at last week's US employment data (a 142,000 increase in total nonfarm payroll employment). My own forecast in last week's newsletter (over 225,000) turned out to be way off the mark. Initially the markets responded positively because of interpretations that this would push back the date of the next interest rate hike, instead of taking it as a sign that the American economy is deteriorating. A number of incidental factors appear to have played a role, such as the fact that in August, car manufacturers retool their factories to build the latest models. On the somewhat longer term, however, our expectations for the US labour market remain bright.
After advancing for quite a number of weeks, global equity markets took a break last week. For the bonds market as well the past week was uneventful. European periphery bonds lost some more ground, which led to slightly wider spreads with Germany.
Ben Steinebach Head of Investment Strategy
The financial markets reacted rather indifferently to the European (and US) governments' decision to ratchet up the sanctions against Russia. Nor did the new European Commission's presentation, as led by Jean Claude Juncker, have any real impact on the markets. The Commission numbers quite a few heavyweights, and its effectiveness seems likely to improve with the appointment of seven coordinating vice-chairmen.
Expectations are high, however, regarding the allocation of EUR 300 billion to investments in the next three years aimed at improving European employment. Meanwhile, next week's Scottish referendum is starting to make itself felt in the financial markets in a two-fold way. A possible “yes” vote is worrying investors not only because of the negative impact a separation would have on the British economy and currency, but also because of the potential knock-on effect on other regions, such as the Basque country and Catalonia.
Apple steals the show in a quiet week
Last week, most equity markets retraced from highs reached in the past few weeks. However, a number of Asian markets, including Japan, did not follow suit and continued advancing. In the business world Apple stole the show with the introduction of the iPhone 6 and the Apple Watch. The new iPhone 6, available in two sizes (4.7 inch and 5.5 inch) and more sleek than the iPhone 5, offers new safe payment options, and the Apple Watch boasts a range of exciting features, including a number of health sensors. Apple's presentation was excellently timed in this week with little business news otherwise: all eyes were on the presentation and afterwards the stock gained over 3%.
Facebook also managed to attract some attention last week. Since July, when the company published strong results thanks to improving revenues from mobile services, their stock has made such gains that Facebook’s market cap passed the 200 billion dollar mark, thus doubling since its introduction in 2012.
A third internet business to make headlines this week was the Chinese internet store Alibaba. Selling more than Amazon and eBay combined, Alibaba is going to float the company on the New York stock exchange next week in what promises to be the biggest tech IPO in history. While most US and European indices lost about 0.5% in the past week, the tech-oriented Nasdaq edged up by 0.2% due to investor focus on technology companies. The AEX lost 0.7% since Friday last, but at 418 on Thursday, it remained around the 420 point mark.
Government bond yields slightly up across the board
Early in the week, we saw positive overall sentiment, reflecting confidence that central banks will continue supporting the economy. The broad US equity index S&P500 closed above the 2000 point milestone for the first time in history.
The subsequent fall of share prices pushed 10-year US Treasury yields back up to over 2.5%, and 10 year German Bund yields to over 1%, in both cases an increase of 7 basis points (0.07% points). This can be viewed first of all as a correction following the sharp decline of yields in the past few weeks. But it also has to do with increasing expectations in the United States that the Federal Reserve might hike its rates a little sooner than generally anticipated. The somewhat stronger rise of yields in the European periphery also extends to France, which announced this week that it will not be able to cut back the budget deficit to below 3% of GDP before 2017.
French 10-year yields rose by twice as much as those in the US and Germany. In Spain and Italy we saw an even higher increase in yields (by 26 and 19 base points respectively), which is probably partially the result of the overly deep fall of Spanish and Italian yields in previous weeks. For Spain, yields were possibly pushed upwards by worries over the Scottish referendum fuelling separatist sentiment in the Basque country and Catalonia. A combination of rising capital market rates and simultaneous downward pressure on short-term rates turned the yield curve somewhat steeper everywhere.
From the King's Speech to Alibaba
Next week is another one without any corporate results or other significant corporate newsflow in the pipeline. Other news will likely focus on Tuesday (the State Opening of Dutch Parliament, called Prinsjesdag) and Wednesday (the Federal Reserve's policy meeting).
Even though a thing or two about the draft budget has already been leaked, we will have to wait until Tuesday to hear all the Dutch government’s plans and the macroeconomic backdrop. Wednesday will mark the end of the two-day meeting of the Federal Open Market Committee, the key policy-making committee of the US central bank. Perhaps the follow-up statement will give us a clue on the bias within the FOMC regarding the timing of interest rate hikes in 2015.
Also next week, inflation data will be released for Italy, the UK and the US, along with industrial production data from the US. Other data coming from the US includes the OECD’s composite leading indicators and the so-called Philly Fed index. The Philly Fed is one of the first indicators to appear of how business activity will develop in September (in the Fed district of Philadelphia, that is). The ZEW index will be interesting as well, as it reveals how investors view investment opportunities in Germany and the eurozone. On Thursday we look forward to the results of the Scottish referendum, which is likely to be a touch-and-go affair. The week will be concluded with Alibaba's stock-market flotation. So it looks like it will be an interesting week on the financial markets after all.