Waiting for Mario Draghi

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Mario Draghi

All eyes were on the European Central Bank (ECB) last week. With inflation in the eurozone at 0.7% and the eurozone economy possibly sliding into deflation, an announcement on additional stimulus wouldn’t have been illogical. ECB president Mario Draghi disappointed, however, saying that the ECB was leaving interest rates unchanged and that no additional stimulus measures would be forthcoming in February.

All eyes were on the European Central Bank (ECB) last week. Ben Steinebach Ben Steinebach Head of Investment Strategy

All is not lost, though: Draghi noted that the ECB is ready to move if needed but that he’s waiting for further information, as the months around New Year often throw up distortions in production and consumer patterns caused by the holidays and winter weather. So any additional measures are likely to be announced in March, particularly if inflation comes down even harder and turns into deflation. Draghi hinted as much by saying that the risks for economic growth in the eurozone are rather more on the downside than on the upside at the moment.

The international equity markets, which had only just found their way up from their price falls earlier in the week, lost their gains again on the news on Thursday, only to recover later in the day when the number of jobless claims in the United States turned out to have fallen much faster in the final week of January than had been expected. Most equity markets ended the week on minor net losses, with the French, British and Dutch markets even recording slight net gains on last Friday’s performances.

Mixed news on the results front
The past week was yet another busy week for fourth-quarter 2013 results. Companies deriving their sales from emerging countries typically performed better than those relying on their European operations, examples of the latter category being KPN and Vodafone. KPN, in particular, reported weak results as its mobile phone operations disappointed and operating profits declined by a hefty 76% at this end of the business. The outlook for 2014 isn’t very encouraging either, as competition in the mobile business is heating up and rival Tele2 has started offering 4G services. Vodafone was hit by a 10% contraction in its European business, particularly as a result of market weakness and price pressures in Spain and Italy – but it at least had something to fall back on in the healthy performance of its operations in the emerging markets. AkzoNobel also presented its fourth-quarter results this week, but these were a bit difficult to read because of restructuring charges and a series of other one-off items. The chemicals giant remains vulnerable to the subdued economic climate, but its results weren’t too bad, especially as it boasts a robust position in the rapidly growing Chinese market.

Safe-haven flight short-lived
The turmoil of the past couple of weeks had sent investors seeking cover in safe-haven German and American government bonds, and yields declined accordingly. However, the tide turned by the end of the week and both German and US capital market yields edged back up. Investor risk appetite increased and was clearly visible in both the equity markets (higher prices) and the bond markets (lower prices). Unlike German yields, though, Italian yields came down a little as a result of falling risks. A lot is riding on what the ECB will do in the months ahead: German yields could stay low for a very long time – as could yields in other European core countries – if the ECB decides on additional monetary stimulus. And if US interest rates are raised, the European and US markets would decouple and currency exchange rates start to reflect the new playing field.

Key week for global industrial production
The week ahead should see another slew of corporate results. A number of key macroeconomic data are also slated for release, particularly on industrial output. Companies due to post their results this week are largely in the food, beverages and tobacco sectors, such as Heineken, Unilever, Nestlé, Coca-Cola and Reckitt Benckiser. Three big European banks – Barclays, BNP Paribas and ING – will report on their performances. The Dutch state has now sold off its remaining share of the Alt-A mortgages portfolio that used to be ING’s, raking in a profit of USD 1.4 billion. TomTom and Ordina are two other Dutch companies that might garner some investor interest in their results.

Besides the US employment figures out today (7 February), next week´s macroeconomics focus will be on industrial production in France and Italy, two of the eurozone´s economic weak links. The United States will release its industrial production figures for December 2013, while we also await January retail sales readings from the Netherlands and the United States.

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