Global Weekly: Strong start to earnings season

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Over the past week, there was a lot of news flowing into financial markets. In general, investor sentiment is positive, as company results have been, on balance, strong, especially in the US. In addition, we also noted some recovery in Chinese equity markets. It is driven by a stabilising yuan and the State Council saying it would adopt a more proactive fiscal policy.

There has also been some relief on trade tariff worries, based on a meeting between US President Donald Trump and European Commission President Jean-Claude Juncker. They agreed to suspend new tariffs and renegotiate existing tariffs between the US and Europe. However, on a company specific level we saw China failing to approve the Qualcomm bid for chipmaker NXP Semiconductors, implying that trade tensions remain.

The second-quarter earnings season is now in full swing. So far, we have seen strong results from companies such as Alphabet and Microsoft in the US; and Roche, Randstad and Nestlé in Europe. However, there were also some negative surprises. Facebook, for instance, lowered their margin guidance for the next couple of years, given the need to invest in innovation, content and data protection. This move hurt sentiment on internet stocks. It remains to be seen if this incident is company-specific or has consequences for the sector.

Veolia, which was recently added to our best ideas list, has opened, together with PV Cycle and the Syndicat des Énergies Renouvelables, the first factory in Europe to recycle solar panels. The recovery capacity of a solar panel is estimated to be 95%. There is an increasing demand to recycle solar panels, as within coming years, many solar panels will reach the end of their life span.

About tweets and noise

In bond markets, the current summer period of low liquidity has been accompanied by numerous tweets and comments from Donald Trump and a roulette of headlines from European policymakers and central banks, both of which have translated into higher (intraday) market volatility. Both US-Treasury and German Bund yields are expected to continue range trading, based on noise rather than economic signals. We expect that this will continue until the US mid-term elections on 6 November.

The ECB meeting this week delivered no new market signals, which should be considered positive for fixed income sentiment. Regarding the reinvestment of redeeming bonds and coupons, ECB President Mario Draghi confirmed that there will be no deviation from the capital key, which would appear to rule out the possibility that the proceeds of maturing bonds in one jurisdiction being reinvested in another. There was also no further clarification regarding the path of future rates. We expect that ten-year Bund yields will continue to trade in the range of 30 to 50 basis points (bp).

Investors are starting to follow the value created in emerging-markets debt after the recent sell-off, which has been caused largely by Trump’s tweets and threats. Flows to hard currency emerging-markets bonds were positive for the second consecutive week, following an 11-week stream of outflows. We believe that coupled with the recent adjustment in valuations, the investment case for emerging-markets bonds has gained support. The key risk remains the US dollar.

Next week, the focus will on a meeting of Bank of Japan policymakers on 31 July. There is speculation of a policy alteration. This speculation has already pushed up core ten-year rates by around 5 bp. If media reports are wrong, it should generally be positive for global fixed income markets.