All week, financial markets were caught up in anticipation of the meeting on Thursday of the Governing Council of the European Central Bank (ECB). Share prices climbed and bond prices fell, indicating an increase in investors’ risk appetite. In the end, however, the impact on markets was limited.
Bond yields rose over the entire week, which suggests an increase in investors’ risk appetite.
Ben Steinebach Head of Investment Strategy
In line with expectations, the ECB cut several of its interest rates. The refinancing rate and the deposit rate were both lowered by 0.1 percentage point to 0.15% en -0.1% respectively. Additionally, the governors expanded a number of liquidity facilities for banks. A programme to purchase Asset Backed Securities (ABS) – securitised SME loans – is under study. Although markets were initially buoyed by the news, witness the falling euro exchange rate and climbing share prices, the ultimate effect was limited. Bond yields initially dropped (as was generally expected), but even before the press conference ended, as it became clear that the ECB was not after all launching a new bond purchase programme, they began edging up again, ending the day just slightly down. Over the entire week, bond yields rose. This suggests an increase in investors’ risk appetite, of which the upbeat mood overall on both US and mainland European equity markets offers further proof. Besides excitement over expected ECB policy changes, the generally positive trend of macro-economic indices helped sentiment.
Equity markets show more direction in US than in Europe
European equity markets ended the week up on balance, despite a lack of direction in the first few days. In the United States, meanwhile, market direction was more unequivocally positive, especially on tech stock market Nasdaq. In Europe, with next to no company newsflow, markets had only macro-economic data to guide them. Early in the week, attention focused on purchasing managers’ indices, which in May - and particularly for industrial enterprises - were slightly disappointing, both compared to forecasts and compared to the April level. As a consequence, markets initially failed to ride the wave of investor optimism regarding ECB policy. From Wednesday, however, sentiment improved and many indices, including the German DAX-30 and the French CAC-40, still managed to end the week at year-to-date highs. Among these was the Dutch AEX, which closed at almost 411 on Thursday and hovered just above this level on Friday morning. In the United States, macro-economic news was more upbeat. The purchasing managers’ index rose, and while the trade balance widened, this also reflected an increase in domestic spending. There was US company newsflow as well, which was generally viewed as positive. Apple, for example, announced the launch of its new operating system iOS8, plus a new app called Healthkit that collects and visualises a range of health-related data. Thanks to this positive economic and corporate news, US equity markets showed clearer direction and posted rather stronger gains than most European markets.
Modest drop in bond yields following ECB meeting
For bond markets, the ECB meeting was of course the week’s defining event. In the end, the yield gap between the US and Europe widened a bit, due to the relatively stronger rise of Treasury yields. At the same time, spreads of europeriphery bonds to German Bunds narrowed, as upward pressure on yields was more modest in the periphery. The outcome of the ECB monetary policy meeting did not entirely live up to market expectations. Especially the announcement – during the press conference – that the ECB was not going to start purchasing government bonds dampened investor sentiment. What the ECB did promise, however, was to provide plenty of liquidity to banks. For example, through a brand-new, targeted longer-term refinancing operation (TLTRO), the ECB will in September and December offer banks facilities linked to the size of their loan portfolios, to a total amount of EUR 400 billion. To ensure that as much of this amount as possible actually feeds through to businesses, banks will not be allowed to use these facilities for the purchase of government bonds. Meanwhile, the regular LTRO (unlimited, against the usual collateral) will be extended from mid-2015 to year-end 2016. Suspending sterilisation (through the sale of other loans) can generate another EUR 120 billion in extra liquidity. Although bond yields were on balance higher at the end of the week than at the beginning, yields started moving downwards after the ECB meeting on Thursday.
Little guidance in the week ahead
The upcoming business week is a day shorter in many countries, with stock exchanges,banks and businesses remaining closed on Monday. There is little likelihood of company newsflow, nor are there any significant macro-economic data releases planned. I have not been able to comment on US job data in this introduction. ABN AMRO estimates job growth in May at 225,000, which is positive, though not as spectacular as the April figure (288,000). This figure, added to the ECB’s fireworks, should ensure firm markets in the week ahead. The next company news is not expected before mid-July, when second-quarter earnings start coming in. In macro terms, the industrial output figures over April from the European Union, France and Italy are still forthcoming. Also in the pipeline are inflation data over May from China, Italy and the Netherlands. With a number of stock markets closed on Monday, little news is to be expected.