Waning risk-aversion among investors

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Map of the world with shares figures

The international financial markets had a decent week. Tensions surrounding Ukraine haven’t disappeared, but they have receded into the background. The macroeconomic news was generally reasonable and the tail end of the results season was a mixed bag.

Europe's equity markets – excluding Britain's – were generally upbeat, aided by reasonable macroeconomic figures Ben Steinebach Ben Steinebach Head of Investment Strategy

The markets in Europe geared up for the European elections, which kicked off in the United Kingdom and the Netherlands on Thursday. Although the official results were only announced on Sunday (once people in all countries have voted), the initial results indicate that right-of-centre anti-European parties have not claimed a major victory. If this is true Europe-wide, it is less likely that the eurozone will start rumbling with turbulence again. Europe’s equity markets – excluding Britain’s – were generally upbeat, aided by reasonable macroeconomic figures. The first signs of the mood among purchasing managers in May isn’t bad. The index edged down in the industrial sector, but the services sectors saw a slight rise, and in both parts of the economy the indices comfortable exceed 50. The minutes of the late April meeting of the Federal Reserve reveal that the Fed isn’t planning to raise its own interest rates (the Fed funds rate) too quickly. Yields on the bond markets in the US and the European core countries inched up, indicating that investors are willing to take slightly higher risks.

Heavyweight Shell makes the AEX a winner

Prices on most of the global equity markets rose slightly this past week, helped by generally favourable macroeconomic figures and by tensions surrounding Ukraine fading to the background. The US and Japan had a listless start to the week, with prices gradually sliding, but later recovered. The initial decline in the US was largely a reaction to the poor results announced by a group of retail firms, with only Home Depot publishing better-than-expected figures. But this shows that equity investors are looking more at corporate results and are less susceptible to the general macroeconomic sentiment.

The sentiment on emerging markets varied. In Latin America, Brazil’s Bovespa lost 2.1% in the past week, but the mood in Asia was brighter, as illustrated by a 1% rise in the Hang Seng in Hong Kong. Japan, too, recovered from its previous fall and closed off Thursday with a 1.7% gain. European markets rose more steadily in the past week, although Britain’s FTSE 100 had to stomach a loss of 0.5%. Germany’s DAX 30 and France’s CAC 40 indices gained 0.9% and 0.5% respectively, but the Dutch AEX stood out head and shoulders, rising 1%. This was largely driven by Royal Dutch Shell, which announced its plans to pay dividend in cash rather than in shares in future and to set up a more efficient equity purchasing programme. Investors clearly appreciated this news, and this heavyweight’s rise in the AEX pushed up the entire index.

More positive ratings for Southern European bonds

Prices on the global bond markets fell slightly, though the decreases were limited in scope. Things in Southern Europe were looking a bit rosier following price declines seen in the previous week. Rating agencies are gradually becoming more optimistic about these countries. After last week’s price plunge in the peripheral European countries, there was more room to breathe this past week, with prices inching up and bond yields coming down. This points to a further improvement in the situation in these countries, and that didn’t go unnoticed by the rating agencies, which upgraded their ratings of these countries. Fitch raised its rating of Greece, for instance, from B- to B and Standard & Poor's upped Spain’s rating by one notch to BBB. Notably, Standard & Poor’s rating of the Netherlands remained unchanged at AA+, although the Dutch public deficit has now dipped far below 3% of GDP.

The words of Fed Chair Janet Yellen had the same effect in the United States, as interest rates will presumably remain low for quite some time. Yields on the corporate bond market came down slightly, narrowing the gap with government bonds with comparable maturities. Increased takeover activity, however, did not lead to a sharper rise in interest rates among the acquired companies. A similar rise is not unusual, as takeovers are often financed with loan capital.

All eyes on election results and consumer confidence

The coming week is set to be a quiet one in terms of macroeconomic figures and corporate results. The most uncertain factor is the outcome of the European parliament elections. The big question is whether Euro-sceptic parties will claim a major victory, in particular France’s Front National. Although such a victory would presumably do little to harm the large majority of Christian Democrats and Social Democrats, it could cause unrest in the European Union, mainly within the eurozone. This, in turn, could send investors back into their risk-averse shell.
Ahold will publish its first-quarter results this week, the last of the Dutch companies to do so. Although Nike and LVMH will announce their results in June and July, Ahold’s announcement will close off the season and we’ll have to wait for August, when second-quarter results start to hit the press. On the macroeconomic front, we’ll be keeping an eye on consumer confidence figures in France, Italy, Germany, the United Kingdom and the United States (both the Conference Board and the University of Michigan). The May European sentiment indicator will also be published, a combination of consumer and producer confidence. A taste of business sentiment came this morning in the form of the German Ifo index, which fell – presumably on the turmoil in Eastern Europe – from 111.2 to 110.4. Still, this index is at a very high level. Business confidence data in the Netherlands and Italy will be published this coming week.

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