Janet Yellen has to get used to her new status

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Federal Reserve

International financial markets shrugged off concerns this week about Ukraine and Crimea. Risk aversion ebbed away, pushing equity prices up and bond prices down. The only hiccup came mid-week from freshly appointed Fed Chair Janet Yellen.

Janet Yellen has to get used to her new status Ben Steinebach Ben Steinebach Head of Investment Strategy

Yellen’s first press conference after a Federal Open Market Committee (FOMC) meeting contained few surprises: the bond-purchasing programme, for instance, will be scaled back by a further $ 10 billion (to $ 55 billion) in the coming period. And, as anticipated, the Fed will reduce its focus on an unemployment rate of 6.5% of the labour force, which means the key Fed Funds Rate could be raised. A broader set of labour market and (forecast) inflation indicators will be adopted instead. The surprise lay in Yellen’s statement that, given the upwardly revised projections, a preliminary key rate hike could occur six months after the purchasing programme is finally wound up. If the current trend continues, that would mean six months from October. A rate hike in spring 2015 would be somewhat earlier than anticipated, and would also mean slightly higher interest rates at the end of 2015. The statement, and the way it was interpreted, went down badly with the financial markets. Although Yellen immediately clarified that all this would depend on the actual strength of the economy, the damage had been done. She still has to get used to the fact that every word the Fed Chair utters is going to be minutely dissected. In the event, equity prices only fell to a limited extent, and had recovered by Thursday.

AEX rises in line with other western exchanges  
Although stock markets had another good week, many have yet to return to their early January levels. In addition to the situation in Ukraine and weak indicators in the US following the harsh winter weather in the early months of the year, concern about the smooth economic development of the emerging countries (China especially) has been weighing on the markets . The latter factor is also plainly visible in the various leading equity indices. Emerging economy stock markets are down substantially on the beginning of the year in all regions. Eastern Europe has shed 12.3%, Latin America 7.3% and Asia 4.7%. Japan’s Nikkei 225 index is down as much as 12.7%, while most European stock markets and the Dow Jones have lost less than 2.5%. Only the American S&P 500 and Nasdaq indices are up on the beginning of the year. In the past week, by contrast, the Asian stock markets – both Emerging Asia and Japan – were the only ones to close lower than the previous Friday, suggesting that concerns about the Chinese economy were seen as the principal remaining risk. Amsterdam’s AEX index rose to 390.82 last week, up more than 2% on the previous Friday. This was in line with other European stock markets, which shrugged off concerns about the situation in Crimea. There was little in the way of Dutch stock market news. SBM-Offshore came under the spotlight after its head of investor relations stated there was no evidence of bribes having been paid in Brazil. The report was later qualified by SBM itself, leaving investors waiting for further clarification. Beter Bed reported a 10% downturn in fourth-quarter sales for 2013, and a slide of no less than 70% in operating earnings. The company’s prospects remain highly uncertain in its key markets, and so we are sticking to our sell recommendation.

Stronger economic growth boosts appeal of high-yield
The bond markets were a mirror image once again of the equity markets, with falling prices and rising yields. Spanish government paper performed relatively well and the outlook for high-yield bonds is improving on the more favourable outlook for the world economy. The spread between Spanish and German government bonds narrowed in the past week from 185 to 170 basis points, having stood at two full percentage points (200 basis points) at the end of 2013. The trend reflects the positive development of the Spanish economy, the functioning of which has been improved by a series of government reforms. The spread is likely to continue narrowing therefore. We expect a further fall to 150 basis points this year and 120 basis points in the medium term. The outlook for high-yield bonds – loans issued by businesses with somewhat weaker credit ratings – likewise continues to improve. This is evident, for instance, from the higher growth projections issued last Wednesday by the Federal Reserve, and preliminary economic indicators for the New York and Philadelphia regions. Europe’s economic prospects are also improving. Last week’s ZEW index (a measure of investor enthusiasm toward the German and European economy) was down, but this reflected the situation in Ukraine. What’s more, the index is still well above its long-term average. The favourable outlook for the global economy reduced the risk of business failures and boosted the appeal of high-yield bonds.

Macroeconomic factors move centre stage
The corporate results season has run its course, so there will be no more earnings announcements in the week ahead. Several very interesting indicators are, however, due on the macroeconomic front. The most interesting of all will be the first, provisional data published on Monday on the mood of purchasing managers in many countries. This will give an insight into business confidence and an indication of future investment activity. Germany’s Ifo index, which is an even more direct measure of business confidence, could supply further confirmation on Tuesday. Numerous countries will also publish fresh consumer confidence data in the week ahead, including the United States (figures from both the Conference Board and the University of Michigan), Germany and France. Inflation figures are also due, lastly, in a range of countries, including Japan and the United Kingdom. 


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