QE is dead, long live QE

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Last week the financial markets carried over the optimism from the week before. The focus was on some of the more prominent central banks. As expected, the Federal Reserve (Fed) terminated its stimulus package (quantitative easing, or QE); Japan, however, chose to expand the scope of its existing programme. The week began with encouraging findings from the Asset Quality Reviews and the stress tests that the European Central Bank (ECB) conducted at Europe’s largest banks, which will shortly come under its supervision. Of nearly 130 banks, 25 (mostly from Southern Europe) were revealed to have failed the tests and were shown to be insufficiently capitalised. Since then, 12 of those 25 banks have reduced their capital deficits to acceptable levels. The Dutch banks came through the tests successfully.

The week began with encouraging findings from the Asset Quality Reviews and the stress tests that the European Central Bank (ECB) conducted at Europe’s largest banks. Ben Steinebach Ben Steinebach Head of Investment Strategy

Despite the positive response from the financial markets, some question marks remain. In light of the ECB’s concerns about the possibility of deflation, it is curious that the stress tests did not include a deflation scenario. Similarly, the potential stress that would result if the eurozone broke up should perhaps have been tested.

Attention then shifted to the meeting of the Fed’s policymakers on the Federal Open Market Committee (FOMC) later in the week. As expected, the decision was announced to end the bond-buying quantitative easing (QE) programme, which until the end of last year had comprised USD 85 billion. However, new purchases will be made up to the amount of the maturing bonds, to ensure that the Fed’s balance sheet remains at the present level. The Fed’s recently-found optimism about the outlook for the US economy (in terms of both growth and employment figures) was one of the arguments for terminating the QE programme.

The Bank of Japan went in precisely the opposite direction and decided, quite unexpectedly, to expand the scope of its existing asset-buying programme from JPY 60-70 trillion (around USD 65 billion) to some JPY 80 trillion (about USD 80 billion). As the inflationary impulse that resulted from raising the VAT rate begins to falter, Japan’s central bank is concerned about a possible return of the deflationary trend that has plagued the country for so long.

The financial markets were also boosted by the generally favourable economic data from both the United States and Europe. In the US, the growth in GDP (+3.5% on an annual basis) and the improvement in consumer confidence exceeded expectations, although orders for sustainable goods fell slightly short. In Europe, an encouraging Economic Sentiment Indicator (which combines consumer confidence and industrial confidence) was published, while business confidence in Germany (the IFO Index) was slightly disappointing. However, further encouragement can be derived from the first signs of economic growth in Spain and Belgium in the third quarter.

Economic recovery underlined by corporate earnings

Last week again saw the publication of numerous Q3 earnings. Most companies’ earnings were encouraging, once more underlining the improving economic outlook. One of the few exceptions was Fugro, which issued a sizable profit warning. Fugro’s Q3 earnings will fall significantly short of what the company had initially projected. Moreover, with its balance sheet weakening further as a result of the increase in net debt, Fugro has decided against paying out a dividend. Capital spending (a very important factor for companies such as Fugro) was also lower than expected.

However, favourable earnings were reported by Royal Dutch Shell, whose product portfolio is now less sensitive to falling oil prices. As the prices of many products are falling less sharply than the costs of the oil that they use, margins are improving. In the international arena Exxon Mobil and Conoco Phillips also overcame the drop in oil prices to present encouraging results.

The same was true of VISA and Mastercard, which have raised the prices that they charge banks for their services. The markets responded to the announcements by pushing both companies’ stock up by around 10%.

Around two thirds of the S&P 500 have now announced their earnings, and 81% exceeded expectations. This serves as confirmation that the US economy is headed in the right direction.
This can also be inferred from the favourable results of Randstad. This early-cycle company, the world’s second largest temporary employment agency with many of its operations in the United States, recorded its best quarter in six years. Its improvement was due partly to the growth in the US, but also to growth in the Netherlands. Despite the slight decline on the German and French markets, its net earnings rose by 35% to EUR 113 million.

The AEX climbed by just under 2% last week, relative to the Friday before. It closed at 403.71 on Thursday and slightly outperformed most other European exchanges, with the French exchange in particular lagging behind (+0.3%).

Focus to shift to Germany’s industrial orders

Some interesting macroeconomic data are expected this week, specifically Germany’s industrial orders. A whole series of corporate earnings are of course also still expected, which will provide a further indication of where the international business world stands. The announcement early in October of the 5.4% decline in Germany’s industrial orders in August heralded a period of pessimism about the outlook for the German economy. This was followed by a drop in production and last week by diminished business confidence (IFO). Yet because August was, in our view, an unusual month (increased sanctions against Russia and concentration of holidays in all federal states at the same time) we immediately suspected that September could be a strong month. Whether or not we were right will become clear on Thursday, when information is released on how industrial orders developed in September.

In addition, data will also be published about industrial output in the United Kingdom and France; the latter should show how weak the French economy truly is. Also much anticipated are the final data about the sentiment among purchasing managers in numerous countries in October.

Another headline will be the data about inflation in the Netherlands, which will be published on Thursday. This is of particular interest in light of the press conference that the ECB has scheduled for the same afternoon, where it will explain its policy and where it might also make announcements about the situation with programmes for buying asset-backed bonds.

The week will close with data about the US job market. After payroll processor ADP presents an initial estimate of the latest employment figures on Wednesday, the official numbers about ‘non-farm payrolls’ and unemployment will be released on Friday.

Corporate earnings that are anticipated include multinational banks such as HSBC and Banco Santander, and also Walt Disney, Deutsche Telekom, Siemens and insurance giant Allianz. The Dutch market will be looking forward to the results of PostNL, DSM, ING, Delta Lloyd and Aperam and to BAM and TKH’s trading updates.

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