The markets had another very good week. The equity markets benefited from positive economic indicators, topped off by strong job growth in the United States.
In June, nonfarm employment in the United States increased by no fewer than 288,000 jobs
Ben Steinebach Head of Investment Strategy
Strong job growth in the United States
In June, nonfarm employment in the United States increased by no fewer than 288,000 jobs, which is much higher than the figure of 215,000 that had been estimated. The employment figures, which are normally published on a Friday, were released yesterday (Thursday) as the US markets are currently closed for Independence Day. The increase in jobs and the fall in the unemployment rate (to 6.1% of the labour force) closed off a week of generally positive economic indicators. Among the other indicators, the purchasing managers' indexes (PMIs) deserve a special mention. Trends in these indices were in line with expectations and were positive in most countries, particularly the United States. An improvement in the mood of purchasing managers can also be seen in China and Europe, with the possible exception of France. In line with this, the IMF cut its economic growth forecast for France.
Equity markets reacted positively
Predictably, the equity markets reacted positively to the developments described above. During the past week, the leading stock market barometers rose without exception, and recorded increases ranging from 1.2% (S&P 500 and France's CAC 40) to over 2% (AEX, NASDAQ and Germany's DAX). The Dow Jones Industrial Average rose above 17,000 points for the first time in its 130-year history, and the S&P 500 and DAX 30 also hit record highs. The stock markets are, of course, still benefiting from low interest rates, and this raises a risk if interest rates start to rise. This risk will not be as great if any increase in interest rates is offset by improved profitability. We may start to gain a better picture of this situation after mid-July, once companies start to publish their half-yearly figures. The AEX also made good gains this week, but it is unlikely to break any records soon, having closed at 419.53 points on Thursday. That said, the index is up 2.1%, which compares very well with the world's other share indices.
High levels of interest in new corporate bonds
In contrast to the equity markets, the past week saw very little movement in the markets for government bonds. By contrast, the corporate bond markets remain very appealing. There are, in fact, some shifts taking place in the government bond markets. The first is clearly the relative increase in returns on US government bonds compared to European bonds. This is due to stronger economic growth in the United States and the persistent threat of deflation in the Eurozone. The European Central Bank (ECB) is doing its utmost to respond to this threat. Several bold measures were unveiled last month, which is why there was little news to report following yesterday's ECB meeting. Nonetheless, ECB President Mario Draghi emphasised once more that bigger guns may be brought out if necessary, in reference to a bond buying programme similar to the quantitative easing of the US Federal Reserve. However, we believe that such a programme is no longer necessary in the Eurozone as Europe's economy is starting to recover too, which will lead to a rise in inflation in the near future. The euro to dollar exchange rate has now started to soften owing to the growing difference in interest rates, and this may help bring about some growth and inflation in the Eurozone.
Another phenomenon concerns the reduction in the difference in yields on bonds issued by Europe's core countries and those issued by peripheral countries. We expect that this trend may continue for a while. The market for corporate bonds remains extremely strong and offers excellent returns. This is true of investment grade bonds as well as high-yield bonds. The good returns are attributable to the strong balance sheet ratios of companies that issue bonds as well as the positive economic outlook, as a result of which the risk of business failures has declined. Moreover, these bonds are in high demand among investors looking for returns, although a difference is starting to appear between the primary market, in which there is more interest, and the secondary market, which is not quite keeping pace with the primary market.
Quiet week expected
We are waiting for companies to publish their half-yearly results, the first of which will appear in mid-July. Once they are published, these results will take over from economic indicators as the drivers of market prices. As far as economic indicators are concerned, the coming week will be much more quiet than the past two weeks, and it could even be a calm week. Ballast Nedam is the only company that will publish results next week, although these results will not cover the second quarter of this year. The company's financial year runs from the start of June until the end of May, and its results for that period will be published on Monday 7 July. As regards economic indicators, inflation and industrial production will no doubt attract the most attention. Inflation figures for June will be published in China (producer and consumer price indices), France and the Netherlands. Industrial production figures for May will be published in France, Italy and the United Kingdom next week. France's production figures in particular will come in for scrutiny, given the IMF's lowering of its growth forecast for France.