The global financial markets were in an extremely upbeat mood in the two weeks around Easter. Falling interest rates and lots of takeover news evidently outweighed the lack of clarity about the Federal Reserve’s policy and warnings from the IMF.
Macroeconomic news in Europe also continued to offer positive surprises
Ben Steinebach Head of Investment Strategy
The ongoing decline in capital market rates is caused by the policy of the European Central Bank (ECB) on the one hand and by a visible division within the policy committee of the US Federal Reserve on the other. The committee members disagree on the timing of the first interest rate increase (June or September). However, whichever month is chosen, there does appear to be some consensus that interest rates will be raised at a more moderate pace than expected until recently. One reason is the recent series of somewhat disappointing economic indicators, such as highly disappointing employment data for March. Although the culprits clearly included temporary factors – severe winter weather on the east coast and port strikes on the west coast – these disappointing data still served to put US equity markets in a less positive mood than their European counterparts. The ECB can now look back on the first month of quantitative easing. Under the programme, which started on 9 March, government bonds worth € 52.5 billion were purchased in March, which is reasonably in line with the Eurosystem’s planned € 60 billion per month. This gave a strong boost to equity markets in the euro area, propelling them to new record levels. A further impulse came from takeover news involving European companies. Examples included TNT-Express (acquired by FedEx) and Royal Dutch Shell, which took over the British BG Group.
Macroeconomic news in Europe also continued to offer positive surprises, for instance with regard to retail sales as well as automotive sales, both indicating that European consumers are more willing to spend again. Greece, of course, also continues to attract interest, although the effect on the financial markets has remained limited so far. The country has repaid its debt of € 450 million to the IMF on time, but has yet to repay about € 9 billion to the Fund this year. Greek banks have regained access to new emergency facilities (€ 1.2 billion) of the central bank, after receiving the relevant consent from the ECB. Meanwhile, time to reach agreement with the eurogroup is beginning to run out. An austerity and reform programme has been put forward – mainly aimed at tackling tax avoidance – but the details still fall short of the creditors’ requirements. Agreement must be reached before the eurogroup meeting of 24 April, but it cannot be ruled out that this deadline – as so often – will not be met and that the pressure needs to be turned up again.
AEX back at 500 points
Without exception, the global equity markets were upbeat over the past weeks. Thanks to the brighter economic picture in Europe than in the United States, the further weakening of the euro against the dollar and the fact that most of the corporate news came from Europe, the European markets did a little better than their US counterparts.
On Wednesday 8 April, the earnings season (Q1 2015) was traditionally kicked off by US aluminium producer Alcoa. Earnings were slightly better than the analysts’ average expectations, but the sketched outlook – and the sales figures – were somewhat disappointing. The news, however, was overshadowed by Royal Dutch Shell’s acquisition of British Gaz (BG) for a total of € 64 billion in cash and shares. With the acquisition, Shell hopes to continue the initiated shift from oil to gas, while also gaining access to new oil fields near Brazil. The combination will create the world’s second-largest oil company after ExxonMobil. The US market, by contrast, responded with disappointment to Intel’s proposed acquisition of Altera falling through. FedEx, on the other hand, was successful in its bid to take over Dutch parcel-delivery company TNT-Express for $ 8 per share in cash (a premium of 33% on the previous day’s price). As both parties are strongly complementary in terms of regional presence and activities, positive synergies are expected. The AEX gained 2% in the past week compared to before Easter and over 3% compared to the week earlier. On the Tuesday after Easter, the 500 point barrier was broken for the first time since early 2002. Although this is not a new record (the index was at 700 points in 2000), the composition of the index has changed greatly and the share prices of many individual companies are now at record levels.
Scarcity in European bond market
The European bond markets have been dominated by ECB policies over recent weeks. The scarcity resulting from these policies is causing demand to shift to other segments of the bond market.
The first three weeks (from 9 March) of the bond-buying programme of the Eurosystem (ECB and national central banks) saw bond-buying to the tune of € 52.5 billion. German government bonds were the biggest item (€ 11 billion), followed by French bonds (€ 8 billion), while the Dutch Central Bank (DNB) purchased € 2.5 billion in Dutch bonds. These amounts are more or less in line with the planned € 60 billion for a whole month. Meanwhile, some scarcity of suitable paper is becoming visible and the effective yield on German bonds for terms of up to and including seven years is negative, the reason being that the new supply of paper is insufficient to meet rising demand so that investors are looking to other segments of the bond market to ensure positive returns. However, yields on corporate bonds are following the downward trend of yields on government bonds, albeit at a slightly slower pace and at some distance. They do so because intensive issuing activity, mainly among highly creditworthy companies, is leading to a sufficient supply of new debt paper, thus limiting the decline in interest rates. Over the coming months, the gap may narrow due to the large number of redemptions and reduced issuing activity on account of the earnings season. For this reason, investors seeking extra yield will probably turn to longer terms and more risk (high yield) and the downward effect on yields will probably be greater, partly because of the smaller scale of these markets.
Earnings season may give markets extra impulse
After Alcoa, more – mainly US – companies are set to present their results. There will also be the usual series of macroeconomic indicators, with inflation data being the dominating feature in the coming week.
In the United States, investment banks Goldman Sachs and JP Morgan are due to publish their Q1 results in the coming week. More important perhaps is that General Electric, often seen as the best indicator of the US economy, is scheduled to announce its Q1 2015 results. Johnson & Johnson and Intel will also publish their results. First up in the Netherlands are ASML and Unilever, while Nutreco (acquired by SHV) will be delisted at the end of the week. The macroeconomic picture is dominated by inflation data. Various inflation data are to be published both for the European Union as a whole and for Germany, France, Italy, Spain and the United Kingdom. The latter country will also publish figures on house prices. The same will happen in the United States where a sentiment indicator for the housing market will be published alongside data on new construction starts. In addition, the United States will release the first data on the economy in April in the form of the Empire State Manufacturing Index and the Philadelphia Fed Index. The Federal Reserve’s “Beige Book”, which provides an indication of the economic progress of the past six weeks, is also keenly awaited by investors. Towards the end of the week, the IMF meeting and the G-20 meeting will be in the spotlight. Ahead of this, the IMF has already published studies on the lower economic growth rate in the western world and the effects of investment funds on the financial stability of the financial markets. In other words, there is plenty to discuss. Finally, prior to the above events, the ECB board will meet to deliberate on the first results of the bond-buying programme. The week will end with US data on inflation and consumer confidence (provisional figure from the University of Michigan).