Merkel and Hollande put pressure on Tsipras

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After last week’s major price swings, the financial markets entered calmer waters this week. Bond prices fell further, but the leading equity markets staged a weak recovery.

Virtually all macroeconomic indicators were favourable. Ben Steinebach Ben Steinebach Head of Investment Strategy

Negotiations between the IMF, the European Commission and the ECB on the one hand and the Greek government on the other are dragging on, with no visible results. The German Chancellor Angela Merkel and French President Francois Hollande got involved in the talks. They’d like to slightly tone down the requirements for spending cuts and reforms, but have warned Greece’s Prime Minister Alexis Tsipras to stop playing poker. Technically, the lack of results was reason for the IMF negotiators to leave the table and return to Washington, although they assured the rest that they were not definitively breaking off negotiations.

But if there is no breakthrough by the end of the month, Greece will not be able to pay off the EUR 1.6 billion it owes the IMF and will face a technical bankruptcy, at any rate for that amount. The financial markets do not seem to be too concerned about these developments. Bond yields inched up, however, with the 10-year Bund yield even surpassing 1%, a first since September 2014. Bond markets seem to be anticipating economic improvement – with good reason, as indicators from virtually every region painted a favourable picture this past week. Still, a slight decline in yields can be expected in the months ahead. There will be a lower level of issuing activity on the German bond market than in the past two months and the ECB’s bond-buying programme could trigger another shortage and a decline in bond yields. We do not foresee yields dipping below 0.1%, however, as growth and inflation forecasts are now too high.

Equity markets cautiously resuming growth

Equity markets last week were clearly unruffled by a lack of results in the negotiations with Greece; the favourable economic indicators were apparently more important. All leading equity markets – except for Asia’s markets – edged up, although they didn’t reach the levels seen at the end of April. Virtually all macroeconomic indicators were favourable. That goes for US employment in May, which added 280,000 jobs, and for retail sales, which rose by 1.2% in the same month. Confidence among small businesses – the backbone of the economy – improved more strongly than expected in May, and all of these indicators suggest that the weakness suffered in the first few months of the year has been overcome. Europe, too, published largely positive data, with German industrial production posting strong growth, especially in the capital goods sector, indicating that investments in Germany and the rest of Europe are picking up. At the same time, Germany is seeing larger wage increases, which in light of (still) low inflation is a positive development . Japan and China also published reasonable to good figures on economic growth and machine orders (Japan) and retail sales (China). In short, there were good macroeconomic figures on all fronts and little corporate news, but this does not necessarily mean bad news. The AEX moved in line with most other exchanges and closed off Thursday at 484.88, 1.2% higher than last Friday. This morning the Dutch index stood slightly lower, but still above 480 points.

Macroeconomic news to dominate next week

It will be around one month before the first corporate results on the second quarter are published. We do, however, anticipate a few interesting macroeconomic figures. We are very curious to see the initial data on the US economy in June, especially the Empire State Manufacturing index (for the New York region) and the Philadelphia Fed index. The question is whether these indicators confirm the favourable picture seen in May. If this is the case, markets will start to expect the Federal Reserve to raise interest rates in September. The US will also be publishing a series of indicators for May which could reinforce these expectations, including industrial production, the number of housing starts and inflation. The Federal Reserve policymaking committee will also convene to discuss monetary policy, at which point we could get a glimpse of the future interest rate policy. Germany will publish the ZEW index, which reflects how investors view investment opportunities in the German (and European) economy. We can also expect figures on movements in consumer prices in May for Germany and the European Union as a whole. And finally, Russia will publish data on its economic growth in the first quarter of this year. This will undoubtedly show a significant contraction of around 2% compared with a year ago.

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