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This week investors were inundated with news. The earnings season reached its climax in the United States. Both in Europe and in the US, the macro-economic data confirmed our positive outlook and investors were treated to a veritable ‘banquet’ of takeover news and rumours.

The favourable macro data are not yet reflected in the interest rate markets. Ben Steinebach Ben Steinebach Head of Investment Strategy

Our conclusion, on balance, is that the US economy is accelerating and the European economy is slowly gathering speed, while we expect the cooling-off of the Chinese economy to remain within bounds. 

Data confirm positive development of global economy

The United States appears to have got over the blow from the extremely severe winter weather early this year. Figures from the manufacturing industry indicate that the recovery initiated last year is continuing. Manufacturers of consumer discretionary goods, such as cars, machinery and household appliances, received 2.6% more orders in March than a month earlier. Demand for capital goods was particularly buoyant, suggesting that businesses are willing to invest again. Despite an unexpected rise in the number of applications for unemployment benefits this week, the underlying trend is still downward. The US Department of Labor is due to publish its new job figures and the unemployment percentage on Friday next week. We are expecting this trend to be confirmed.

The housing market data put a slight blemish on the predominantly positive sentiment. The rise in mortgage interest rates which started late last year is starting to have visible effect. However, in view of the limited stock of existing and new housing, the short average time to sell an existing house (about 5.2 months) and the growth of the US population, the market remains tight and prices will inevitably rise further in due course.

In the first quarter Europe benefited from the exceptionally mild winter weather. The returning optimism in the Eurozone was corroborated by the upbeat purchasing manager and business confidence data in Germany. In the European periphery, too, the worst of the problems appears to be over, with the Spanish central bank revising up its first-quarter growth figure for the Spanish economy to 0.4%. The growth acceleration corresponds with the signs that jobs growth, consumer spending and industrial production are all gaining momentum in Spain.

Positive signals are not yet reflected in the interest rate markets

The favourable macro data are not yet reflected in the interest rate markets. Normally speaking, interest rates rise when the economy picks up. However, due to statements from European Central Bank President Draghi about his willingness to take unconventional measures if inflation in the Eurozone remains persistently low, the limited bond issuance activity and the recurring unrest in Ukraine, interest rates fell again this week on balance. Major market parties are holding their bonds longer and are shifting their investments further towards the end of the yield curve. Particularly bonds with maturities between 20 and 30 years were in demand, pushing down interest rates in this segment. This suggests that investors are not counting on any increase in Eurozone interest rates in the coming months, which corresponds with our interest rate outlook.

Earnings and takeover news dominate equity markets

Encouraged by strong Apple earnings, favourable macro-economic data and a spate of takeover news, the equity markets resumed on an upward trend after the correction last week. The US earnings season reached its climax this week. Over 200 S&P 500-listed companies have now published their quarterly figures, with 76% beating analysts’ profit expectations and 53% surpassing sales expectations. Low interest rates, reduced commodity costs, stable wage developments and reviving investments and consumer spending were the principal ingredients for these good corporate figures – which were all the more surprising given the earlier warnings of a disappointing earnings season.

Apple, the technology group with the largest market capitalisation in the United States, gained 8.2% on Thursday after publishing better-than-expected results for its fiscal second quarter. On Wednesday evening, the company also announced its intention to expand its share repurchase programme and raised its dividend. On top of this, Apple announced a 7-for-1 share split.
The improvement of the economic climate has not yet translated into stronger profits for European companies, which are mainly contending with the expensive euro. In the Netherlands this became painfully clear in the figures of Unilever and Heineken.

However, investors in Europe were already able to benefit from the mounting takeover fever this week. The signs early in the week were that the takeover speculation would be confined to the pharmaceuticals sector, but it now appears to be spreading to other sectors. General Electric is reportedly in takeover talks with the French Alstom, America Movil of Carlos Slim has made a bid for Telekom Austria and Volkswagen is said to be preparing an offer to persuade the minority shareholders of the Swedish Scania to sell their shares to Volkswagen.

In conclusion, we can say that the equity markets resumed the upward trend this week – despite the unrest in Ukraine.

Mark Schneiders,
in the absence of Ben Steinebach
Head of Investment Strategy

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