Mounting tensions in Ukraine and Middle East

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International financial markets lacked direction in the past week. Equity markets started the week calm and range-bound, but lost considerable ground on Thursday. It is unclear whether this can be attributed to the Malaysian Airways plane disaster or the escalation in the Middle East.

International financial markets lacked direction in the past week. Ben Steinebach Ben Steinebach Head of Investment Strategy

During the whole of last week, at any rate, it was clear that risk aversion was mounting in financial markets. On bond markets, this was reflected in rising prices and declining yields. Needless to say, the speeches held by Federal Reserve Chair Janet Yellen in US Congress were influential in this respect. While the dovish tone sent yields lower, she also spoke of excessive valuations in some areas on the equity market, and suggested that, should the US job market make a speedier recovery than generally expected, interest rates could after all be raised before mid-2015.

Macro-economic data published in the past week was generally positive. Chinese data was particularly strong, showing GDP growth accelerating to 7.5% in the second quarter from 7.4% in the first quarter, and thus defying expectations of a slowdown. But from the US, too, came upbeat reports: on retail sales and their underlying trend, about business confidence (with both the Empire State Manufacturing Index and Philadelphia Fed Index unexpectedly rising in July). The only sour note was the fall in US housing starts by nearly 10% in June.

In Europe, data flow was light in the past week, with German inflation coming in a smidgen higher and the ZEW index, which reflects German investors’ take on the German and European economic situation, falling marginally but remaining above its long-term average. A real turnaround in market sentiment came on Thursday, when Israel announced its intention to launch a ground offensive in Gaza, despite attempts by Egypt earlier in the week to broker a ceasefire between Israel and Hamas. Later, the Malaysian Airways Boeing coming down in Eastern Ukraine sent shock waves around the world and in financial markets, with Eastern European equity markets suffering particularly heavy losses. Tensions had already been building in this region after the West tightened sanctions against Russia, following the failure of pro-Russion seperatists to honour an agreed ceasefire.

Early Q2 earnings newsflow mixed

Last week saw the earnings season gather momentum, especially in the United States. While results in to date are not bad, it is hard to distill any significant trends from them yet. The coming week will feature a surge of corporate earnings announcements, which will undoubtedly provide more clarity. Most US companies reported slightly better-than-expected earnings, including financials Wells Fargo, Citigroup and Bank of America. In the latter case, per-share earnings disappointed due to a number of one-off items, but adjusted for these the trend was after all positive. Google was another company where earnings did not quite meet analysts’ expectations, but sales growth was so strong that the share price gained 3% anyway. IBM’s shares fell 2%, despite earnings being handsome and beating expectations, due to problems that¬† the company is having with its drive to shift its core business - at least partly - from hardware to software.

US equity markets initially rose, with the Dow Jones remaining in 17,000-plus territory, but on Thursday they lost ground and the Dow dropped back below the 17,000 mark. In the Netherlands, ASML presented excellent and consensus-beating Q2 results, but markets were not well pleased with the company’s gloomy forward guidance.¬† Sligro reported mediocre results, especially at food distribution, where competition is fierce and margins are under pressure. The AEX did manage to remain above the 400 mark all week, moving between 403 and 409 points and closing on Thursday end of business at a level of 404.84.

Capital market rates down again

Around the globe, capital market rates were under downward pressure in the past week. Fed Chair Janet Yellen’s dovish tone helped, as did large bond purchases by institutional parties, while concerns relating to the Portuguese bank Espirito Santo eased. In Germany, 10-year Bund yields hit an all-time low of under 1.15%. No doubt this is partly due to the situation in Ukraine, which had already led to sanctions being tightened even before the Malaysian Airways plane disaster occurred, as well as to the mounting tensions between Israel and the Palestinians. In the United States, too, Treasury yields continued to decline, despite GDP growth accelerating and the Federal Reserve continuing to taper its bond purchasing programme. Apparently, the Fed’s gradual withdrawal from the market is being sufficiently offset by other major buyers, notably Chinese and Japanese ones, who are making large-scale purchases of US Treasuries and European sovereigns. Besides, the worries last week surrounding the Portuguese bank Espirito Santo have eased, leaving bond yields in Portugal, but also Spain and Italy, back where they were before the commotion started. In the Netherlands, 10-year government bond yields fell to a level of just under 1.4% on Thursday.

More corporate earnings than macro data

Next week will be dominated by corporate earnings announcements, which are likely to crowd out macro news to some extent. That said, there are some interesting macro releases scheduled for next week. In the week starting 21 July, as many as 32 companies will be publishing their Q2 results. Without being exhaustive, we will be focusing internationally on Coca Cola, Microsoft (which is about to cut 18,000 jobs), Boeing, GlaxoSmithKline, Caterpillar, Roche and LVMH. In the Netherlands, we expect earnings announcements from Philips (which is struggling with its Health Care division), Unilever, Reed Elsevier, Nutreco, AKZO Nobel, Air France KLM and Tom Tom, Quite a list, in other words, which should tell us a lot more about the entrepreneurial landscape. On the macro level, the publication of provisional purchasing managers’ indices in many countries should be of interest. In addition, a lot of general business confidence data will be appearing in countries like Germany (Ifo), Belgium and the Netherlands. Regarding consumer confidence, data will be appearing in the EU, Italy and Germany. In the US, inflation and housing market data are scheduled to be published.

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