Global Weekly: Stock markets slightly lower

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This week we saw a slight decline in equity markets. The trade conflict between the US and China escalated, after the US imposed new tariffs on USD 200 billion of Chinese goods. The Chinese responded immediately with new trade tariffs on USD 60 billion of US goods.

The Chinese also cancelled trade negotiations with the US. The Hang Seng Index declined after this, but recovered a bit during the week. Stocks in the US, Europe, Japan and China fell, after the US Federal Reserve raised interest rates. Investors expect more interest rate increases into next year.

This weekend one of the longest takeover battles in UK history ended. Comcast and 21st Century Fox both wanted to buy Sky. The takeover auction was won by Comcast. In this auction, they acquired more than 30% of Sky shares. They offered a price of GBP 17.28 a share, much higher than the GBP 15.67 a share offered by Fox. Fox has announced that it intends to sell its Sky stake to Comcast at GBP 17.28 per share. Since 21st Century Fox has a stake of about 39%, this would mean that Comcast would get a stake of more than 70% in Sky, which equates to complete control. Disney, which is purchasing Fox, agreed to the sale and will use the proceeds from the Sky sale to lower their debt.

MSCI, a leading provider of indexes, announced today the launch of ex-tobacco involvement indexes. This launch shows that more and more investors are looking at portfolios for which tobacco is excluded. ABN AMRO has excluded tobacco for years for clients invested in sustainable mandates. Earlier this year, ABN AMRO stopped advising clients regarding tobacco companies and also excluded them from other portfolios.

A volatile week for bond markets

ECB President Mario Draghi surprisingly emphasized the expectation of a relatively strong inflation pick-up this week. As a consequence, Bund yields reached a new high since the turbulence in May. In line with this development, US Treasury yields have climbed above 3.1%, at eye level with the highest yields seen over the past seven years. From now on, investors will clearly have an eye on the development of inflation, trying to estimate if Draghi’s expectation will come true and how it would influence the ECB’s forward guidance. So far, an earlier start to rate hikes does not seem to be a subject of debate, but Draghi’s words open room for speculation about a possible faster pace of the rate-hike cycle.

After the market had adjusted to the news from the US Federal Reserve and ECB this week, politics kicked in, leading to volatility. Italy’s budget deficit for 2019 is a key indicator of the willingness of the new government to accept a worse financial situation for the country in order to finance the expensive election pledges of its politicians. Due to the overall supportive economic environment in Europe and beyond, we do not see imminent risks. Nevertheless, if Italy is going to continue higher public spending in the next years, there is long-term risk of credit-quality erosion.

Looking forward, the declining volume of bond purchases by the ECB may become a factor to watch. Within corporate bonds, a significant pick-up in issuance volumes indicates that companies expect an impact on their financing costs and are trying to access the primary market for as long as the ECB is still acquiring eligible credits. As the details of the ECB’s buying and reinvestment strategy are unknown, the effect is difficult to estimate. However, the observation that the ECB’s share of primary issuance is shrinking, despite the larger supply, may be an indicator of higher pressure on corporate bond risk premiums from now on.