Major fluctuations on the financial markets

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Prices on the global financial markets – equity as well as bond markets – tumbled this past week. This steep decline was triggered by the ongoing difficult negotiations with Greece and unwise comments made by ECB President Mario Draghi.

As there was little business-specific news this past week to which the equity markets could respond Ben Steinebach Ben Steinebach Head of Investment Strategy

It was Mario Draghi’s comments in the press conference this past Wednesday that affected the markets the most. Mr Draghi said that investors should get used to greater volatility (major price fluctuations) on the financial markets. A remark like that from the president of one of the most important central banks in the world has a direct impact on the markets. Bond yields shot up and equity prices plummeted. German 10-year Bund yields, which had already been inching up, quickly rose almost 20 basis points. Bond yields in other European countries and the United States followed suit.

Interest rates had already risen earlier in the week following the publication of new inflation figures in the eurozone, which were back into positive territory in May (up 0.3% on a year earlier, compared with 0% in April). Adjusted for the effect of energy and food prices, inflation rose from 0.6% in April to 0.9% in May. The financial markets subsequently considered it more likely that the ECB would stop buying bonds before September 2016. These were the expectations of a market that is already very unstable and, in the case of the German bond market, contending with a lack of liquidity, meaning prices can fluctuate severely. On balance, German 10-year Bund yields this past week rose 30 basis points to 0.83% and the ECB’s bond-buying programme is apparently not enough to make up for the sale by other parties. Under these circumstances, we do not believe a return to the lows seen in late April (0.07%) is very likely.

The mood in the markets was not helped by the ongoing negotiations with Greece. The Greeks urged the IMF to allow Greece to combine three payments that are due this month (totalling EUR 1.6 billion) and to pay them off at the end of the month. The question remains, however, whether Greece’s cutbacks and reforms will be enough to satisfy its European partners. This might be clarified next week.

Equity markets decline

As there was little business-specific news this past week to which the equity markets could respond, prices were driven mainly by macroeconomic data and by movements in the bond markets. The macroeconomic news was generally positive, confirming our opinion that Europe’s economy is still improving and the US economy is recovering from a brief slowdown as a result of weather conditions and strikes. Business confidence in the US is developing more favourably than had been expected, as are incomes, and the job market is giving the economy a boost.

Favourable indicators were also published in Europe. New orders in the German industrial sector were 1.4% higher in April than they were in March and reflected an increase mainly in orders for capital goods from other European countries. This presumably points to healthy investment activity in the eurozone. The eurozone retail sector also published positive news, so we can conclude that European consumers are gradually starting to spend more. Despite this, equity prices fell across the board last week. This decline can be attributed to the generally deteriorated sentiment caused by Greece and the rise in yields on the international bond markets. The leading indicators in both the US and Europe came down on balance by around 0.5%. The steepest declines were seen in the British FTSE-100 (-1.8%) and in the AEX (-1.7%). The AEX closed off Thursday at 485.29, having dropped below 480 on Wednesday. On Friday the Dutch index was back below 480. Perhaps the US employment figures, to be published this afternoon, will perk up the equity markets.

No corporate news expected in the week ahead

Het resultatenseizoen van het eerste kwartaal is geëindigd en het enige bedrijfsnieuws dat de komende weken kan worden verwacht, zijn ad hoc gebeurtenissen en nieuws op het gebied van fusies en The first-quarter results season has ended and the only corporate news expected in the coming week are ad-hoc events and M&A activity. This means that macroeconomic news – including news about Greece – will be relatively important. We have also seen busier weeks on the macroeconomic front. Yet a few interesting figures are set to be published. We are, for example, looking forward to data on industrial production in Germany, the United Kingdom, the European Union (all in April) and China (in May). We are particularly interested to see whether the slow growth that China posted in April (yet still at 5.9%) will be repeated or whether it will pick up. China will also issue data on inflation, retail sales and investment activity in May. The United States, meanwhile, will publish a report from the NFIB on sentiment among small businesses and retail sales data. With a view to how oil prices will develop in the future, we are also eager to see the data on US oil reserves. And finally, various European countries (including France and Spain) will present inflation figures for May in the week ahead.

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