Markets torn between hope and fear about Greece

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World economy

Relative calm was restored to the global financial markets last week following the large price swings in the previous four to five weeks. Equity markets inched down on balance, while bond markets edged up.

An exception to the moderate decline in prices was seen in China, where prices tumbled last week Ben Steinebach Ben Steinebach Head of Investment Strategy

Negotiations with Greece continued to dominate the mood. The Greeks would have the world believe that an agreement is at hand, but the other participants in the process think otherwise. This is presumably part of the game, making it easier for the Greeks to put the blame on the other partners should the talks fail. Plus Greece hopes to keep its citizens from moving their money abroad. The European negotiation partners are using this strategy to achieve the best possible result. The coming weekend could be a defining moment. Equity prices in particular fluctuated in sync with the sentiment around Greece, with prices rising steeply on Wednesday and losing ground again on Thursday. Prices were also influenced by mostly favourable macroeconomic news, which had often been otherwise in the previous few weeks. Encouraging indicators came from the key regions. In the US, previously published orders for sustainable goods – a reasonable indicator of business investments – increased considerably in March, while orders in April (excluding the extremely fickle orders for transport vehicles) rose by another 0.5%. Figures for the US housing market for April and consumer confidence in May were favourable. We even saw a slightly more positive picture in Japan, which in the previous months had put in a disappointing performance in terms of economic growth, industrial production and business confidence among SMEs. The European Union also reported favourable figures for general sentiment in the eurozone (a combination of consumer and producer confidence), German consumer confidence and Dutch and Belgian producer confidence. We expect US economic growth to be significantly adjusted downwards this afternoon, which could cause disappointment in the markets. We are not terribly concerned, though, given the much better outlook for the current quarter. Bond prices edged up in the US and the strong European countries, while Spain had to deal with a decline in prices and a considerably widening interest rate gap with Germany. Despite the fall in interest rates in the US and most European countries, high-yield spreads came down. Insolvency risks are currently very low: 1.5% in the US and 0.5% in Europe, which is much lower than the long-term average of 4.5% and 5.2% respectively. With high-yield spreads at 430 basis points for the US and 350 basis points for Europe, we still think these are attractive investments.

M&A rumours galore

Besides the sentiment around Greece and positive macroeconomic indicators in most regions, there was a lot of news on mergers and acquisitions, which influenced the equity markets. An exception to the moderate decline in prices was seen in China, where prices tumbled last week. The lower prices in China can be seen as profit-taking following the extremely steep price increases earlier this year. This was presumably caused by disappointing macroeconomic figures (an exception this week) and the fear – not shared by us – of a hard landing of the Chinese economy. Interesting news on the M&A front came from the semiconductor sector, where Intel might be preparing to take over fellow sector company Altera for a rumoured USD 15 billion (USD 54 per share, which would mean a premium of 15%). An attempt to do so by Intel failed in April after Altera reported disappointing results, and both companies decided to take a break until 1 June. With this date rapidly approaching, tongues are wagging again. There was also news last week about NXP acquiring Freescale, plus there were two actual takeovers: Avago Technologies acquired Broadcom and Charter Communications bought Time Warner Cable for USD 55 billion (leaving France’s Altice in the dust). Ahold stayed in the news for two reasons: the company published its results and it is expected to acquire Belgium’s Delhaize. The results received mixed reviews, as Ahold’s profitability in the first quarter decreased as it placed more priority on increasing its market share. The AEX closed off Thursday at 502.24, up 0.1% on Friday of the previous week, making the Dutch index one of the few risers in the international arena. This morning the index was back down, to 498.5.

Plenty of macroeconomic news in the coming week

Although there could be plenty of news about mergers and acquisitions, the reporting period has ended and we will have to wait another six weeks. Developments on the macroeconomic front fully make up for this lack of news. Needless to say, we are looking forward to the definitive figures on purchasing managers’ sentiment in many leading countries and regions. We will pay particular attention to (hopefully upward) adjustments of the preliminary figures in the US and Europe, which were published early last week. Our eyes will also be on the European Central Bank and the Bank of England, which are holding their regular policy meetings on Wednesday and Thursday respectively. On Wednesday, the US will publish the Beige Book, which shows the state of the economy in the individual Fed districts in the past six weeks. The US will also publish data on personal income and spending in April; we are curious to see whether they confirm the recovery we expect following the weak first few months of this year. In addition, new data on factory orders in April in both the US and Germany are set to be published, and we expect higher figures for both of these countries compared with March. Germany will also be publishing unemployment rates for May. The European Union, meanwhile, will announce data on retail sales and preliminary figures on inflation. The week will finish up next Friday with unemployment and employment figures from the US, with an expected 223,000 increase of the latter. But first we have to see whether the revised first-quarter GDP in the US, to be announced this afternoon, isn’t too disappointing.

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