Financial markets across the globe managed to maintain the upbeat mood this week, even though price gains were somewhat more modest than in the previous two weeks. A defining event for sentiment was the OPEC meeting held near the end of the week.
This week's more favourable economic news came from Europe, where the Economic Sentiment Indicator edged up
Ben Steinebach Head of Investment Strategy
At the OPEC meeting, a decision was made to maintain the cartel's production quota of 30 million barrels daily (notwithstanding that actual production is 31 million barrels). Some oil-exporting countries outside the cartel, including Russia and Venezuela, were hoping for the quota to be lowered in order to stop or even reverse the decline in oil prices. However, this did not happen, and prices sank even further from USD 77 to just above USD 70 for a barrel. This will put even more pressure on inflation, with inflation expectations being adjusted downwards in countries and regions where inflation is already quite low, such as the eurozone. Even though low oil prices can be favourable for consumer purchasing power, declining and stubbornly low inflation expectations can contribute to the development of deflation and trigger a spending slump. For the European Central Bank (ECB), this should be an extra reason to step up its interventions and possibly switch into buying sovereign bonds (QE). Anticipation of such a step has driven the benchmark 10-year Bund yield (and yields elsewhere along the curve too, for that matter) to new lows.
This week's more favourable economic news came from Europe, where the Economic Sentiment Indicator (an indicator combining business and consumer confidence) edged up. And Germany was the source of some encouraging data as well, creating a welcome break from the pessimistic economic outlooks of the past two months. Following a week in which the ZEW indicator ticked upwards for the first time in a year, last week the key business confidence index Ifo made a gain as well, ending a weak spell that had lasted since April this year. Data from the United States however, was more mixed. In good news we saw the upward adjustment of economic growth over the third quarter, from 3.5% to 3.9% compared to this year's second quarter. However, this was partially offset by weak figures on durable goods orders and on personal income and spending. Nevertheless, the US economy still looks robust. Today, on Black Friday (the day after Thanksgiving, when many Americans have a day off and go shopping), we will likely get an indication whether December spending will contribute towards growth.
Equity market momentum slower, but still positive
Leading stock markets continued to advance in the past week, albeit at a somewhat more sluggish pace. In addition to positive European data, prices were supported by declining interest rates. On Thursday, the US Stock Exchange was closed due to Thanksgiving, and therefore failed to offer any real direction. Most markets gained approximately 0.5% since last Friday. Germany was an outperformer, gaining almost 2.5%, mostly on the back of the long-awaited recovery in business confidence. Both the British and Japanese markets lost some ground following relatively strong gains in the week before. In the United States, technology index Nasdaq and the Russell 2000 (an index of smaller listed companies) both gained over 1.5% in three days. The Dutch AEX improved by over 0.5% to 425.75, hitting a new high since mid-2008. In the trickle of company news that was released, we saw ASML organising a Capital Markets Day, where new targets for 2020 were announced. The business is aiming for an annual volume of EUR 10 billion and a threefold increase in earnings per share to EUR 7.50. The company also revealed that Taiwanese chip manufacturer TSMC has ordered two production machines which will be delivered in 2015.
All eyes on the central banks
Due to oil prices still declining and the extra threat of deflation, central banks find themselves in the spotlights now. Especially from the ECB Governing Council, we again saw numerous hints this week with regard to future policy measures. The week started off with the Chinese central bank cutting interest rates by 0.4%-points down to 5.6% to avert a looming and undesirable slowdown in economic growth. This makes the Chinese central bank one of the few still able to successfully wield the interest rate weapon - for the majority, this is not an option because their interest rates are too close to 0%. In the eurozone, president Mario Draghi again spoke reassuring words in the face of impending deflation, but last week's most concrete words were spoken by vice-president Constâncio, who is expecting the ECB to start a serious sovereign bond buy-back programme in the first quarter of 2015 – a step that the Germans are currently strongly opposed to. So far the ECB has made use of liquidity injections into the banking sector (TLTROs), and more recently, the bank has also been buying up covered bonds in a bid to boost lending and to force down bond yields (as well as the euro exchange rate). Meanwhile, yields are indeed under further pressure: even France's 10-year bond yield has dropped below 1%, with its Spanish and Italian counterparts hovering around 2%.
ECB and US labour market data take centre stage
Next week we are expecting little if any company newsflow. In terms of macro-economics, attention will be focused on the end of the week, with the ECB Governing Council meeting on Thursday, and the monthly announcement on US job market data on Friday. Early in the week, final figures will be published on purchasing manager sentiment. These are expected to be in line with the tentative data presented a week and a half ago. Furthermore, there will be some unemployment data from France and Belgium, which are likely to leave the financial markets unaffected. However, this is not the case for the US labour market and unemployment figures, which will be released on Friday afternoon. Expectations for non-farm employment growth are running high, with some counting on an increase of over 250,000 jobs. On Thursday, the ECB's Governing Council will meet to discuss monetary policy. The governors will likely shed some more light on the details of buy-back programmes and the modalities of the TLTRO (liquidity facility) which banks can subscribe to in December. Much will depend on the ECB's analysis of the latest inflation data from Germany (0.5%). Is that low inflation level simply a consequence of the decline in oil prices, or is deflation becoming a real threat?