Global Weekly: Choppy markets

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Stock markets have been choppy this week. As of Thursday afternoon, the S&P 500 Index is now back above its level at the end of 2017. This is following the decline in stock markets that began at the end of January. The European and Japanese stock markets have also somewhat recovered, but are not yet above their levels of year-end 2017.

Euro-area economic confidence slipped in February from 114.9 to 114.1, which was broadly in line with expectations. This was the second consecutive monthly decline after the index touched a 17- year high in December. Business confidence in Germany fell, while the euro-region Purchasing Managers Indexes showed manufacturing and services activity had weakened by more than what was forecast.  Most eurozone indicators are still at high levels, which suggests the eurozone economy is robustly expanding.

In the US, the new chairman of the Federal Reserve, Jay Powell, made his first testimony to Congress on Tuesday, saying he expects the American economy will remain strong.  After his testimony, the probability that the Fed would hike rates four times in 2018 increased. US stock markets reacted with a decline, which was followed by a retreat in Asia and Europe.

Booking Holdings (formerly Priceline) reported better-than-expected results. The stock rose by almost 10% in a declining market. Koninklijke Ahold Delhaize also reported better-than-expected results, due, in part, to lower tax payments in the US and Belgium. The stock gained 3% in a declining market.

Some acquisitions were in the headlines this week. Among life sciences companies, Bayer announced that it would need more time for its takeover of Monsanto, but still expects the deal to be finalized in the second quarter of 2018.  Within media, there is a battle going on for Sky/21st Century Fox. Walt Disney recently made a bid for 21st Century Fox, where Sky is named as one of the company’s pearls. This week, Comcast made a bid for Sky alone. The question is whether Walt Disney would want  21st Century Fox without Sky and if a bidding war begins for Sky.

Bond markets on hold

Ahead of the Fed policy meeting on 21 March, new Fed Chief Jay Powell had the chance to send a more hawkish signal. At his Congressional testimony on Tuesday, he spoke of the robust economic environment. This caused a brief spike in US 10-year Treasury yields to an uncomfortable level for risky assets of around 2.92%. Simultaneously, speculative short futures positions were extended to new record levels, which increases the likelihood of a quick recovery in Treasury yields. 

The Fed is currently signaling three hikes this year and just two next year, which would take the Fed funds target range to 2.75%. This is the Fed’s estimate of the natural rate of interest, indicating when monetary policy is neither pointing toward expansion nor contraction. There is an increasing chance, depending on inflation data, that the Fed will step on the brakes by raising the policy rate above the natural rate of interest. This would mean raising rates more than twice in 2019. While we still expect yields to move higher in 2018, it is possible that we could see some stabilisation before the next leg upwards.

In the eurozone, all attention is on Sunday’s election in Italy and the decision by the socialist party in Germany concerning participation in a new grand coalition. We do not expect any surprises in Italy and expect a favourable outcome in Germany. With subdued eurozone inflation data, general risk sentiment should remain contained ahead of next week’s ECB meeting. Investors will be looking for hints regarding the central bank’s exit from its asset-purchasing programme.