Jackson Hole, Wyoming saw its annual Economic Symposium from 21 to 23 August, attended by the world’s central bankers, and financial markets were still largely busy digesting the outcome in the past week. Mario Draghi, president of the European Central Bank (ECB), made certain comments that caused European bonds yields to fall further. Ten-year German Bund yields even dipped below 0.9%. The conflict in Ukraine also cast a shadow over the markets.
Yellen confirmed again that, if economic growth and employment figures continue ticking up more quickly than expected, interest rates will probably be raised ahead of schedule.
Jacqueline van der Neut Investment Funds Specialist
Mario Draghi hints at new measures, Yellen takes a more balanced tone
Comments by Mario Draghi, president of the ECB, have made monetary easing more likely. During his speech he emphasised that eurozone countries should make better use of the room for manoeuvre that budgetary rules in the Stability and Growth Pact offer. In addition, he said that the preparations for ECB buying of asset backed securities are all on schedule. Major monetary easing will likely only happen if other policy measures are not effective enough, or if inflation risks and other economic risks increase.
The contrast between Draghi's speech and that of his US counterpart Yellen was striking. FED Chair Yellen, who has a reputation for being dovish, has shifted slightly towards a more balanced policy course. She confirmed again that, if economic growth and employment figures continue ticking up more quickly than expected, interest rates will probably be raised ahead of schedule. We expect US growth to continue, possibly leading the Fed to up rates sooner than currently indicated. Our basic scenario is that the Fed will start raising interest rates during the summer of 2015.
German Bunds at record low, US dollar higher
In response to ECB president Draghi's comments, European government bond yields have declined. Monetary easing, after all, means that interest rates will remain low for some time to come and certainly will not rise. On Thursday, yields on the benchmark German 10-year Bund even hit a record low of 0.866%. Dutch 10-year goverment bond yields approached the 1% mark for the first time ever. Southern European yields also declined, with Italian 10-year government bonds temporarily yielding less than US Treasuries.
The US dollar exchange rate reached its highest peak since September 2013, due to expectations that the Fed might possibly up interest rates earlier than the markets have been assuming. Unlike the dollar, the euro lost some ground. Anticipated higher US interest rates combined with the low euro exchange rate (and the prospect of it remaining low for some time to come) makes the euro a less attractive option for investors.
S&P500 touches all-time high
Early in the week, the markets were largely positive, due to the notion that central banks will continue to support the economy for a while. The broad US stock market index S&P500 closed at over 2000 points, an all-time high. However, this level could not be maintained, as on Thursday intensified unrest in Ukraine began to weigh on markets. Both NATO and the Ukrainian president Porosjenko announced that currently 20,000 Russian soldiers are stationed near the Ukrainian border, with 1000 Russian soldiers fighting side by side with separatists in eastern Ukraine.
Russia's actions have been condemned by US and European political leaders, but Russia denies being involved. Fears of an escalating conflict are growing. This cast a shadow that even the upbeat US macro-economic data released on Thursday could not dispel. The US gross domestic product over the second quarter, the number of jobless claims and house sales all showed better-than-expected improvement in July.
Icesave: all's well that ends well
This week it was announced that the Dutch state will be reimbursed for the money it paid to savings account holders of the Icelandic internet savings bank Icesave when it went bankrupt in 2008. Dutch Finance Minister Dijsselbloem said the total sum was over 1.4 billion euros. The Netherlands has already received 811 million euros from Landsbanki. The remainder of the claim has now been sold for 623 million euros by the government to market parties and investors. They are going to attempt claiming the money from Landsbanki.
The earnings season has ended. It's going to be a while until quarterly reports from businesses start coming in again. Regarding macro-economic news: next week all eyes will be on the ECB’s announcement of its interest rate decision and the subsequent press conference. This news will come in on Thursday, along with data from payroll services company ADP, which offer an indication of unemployment in the United States. On Friday US monthly data on applications for unemployment benefits will be published, an important indicator for US economic growth.
In addition, next week we expect to see purchasing managers' data from China, Germany (both on Monday) and the US (Tuesday). On Wednesday, eurozone retail sales data will be released - a key indicator of European growth. On that same day in the US the Fed will publish its so-called Beige Book. This report, which is issued eight times a year, is a gathering of anecdotal information from banks on the current economic situation in the US. But first the Americans will be enjoying a long weekend off, as next Monday is Labour Day, and US stock markets will be closed.