Traders were concerned about the pace of potential rate cuts by the European Central Bank (ECB) this year following a hot inflation reading and wage increases released out of Germany on Wednesday. The sentiment was already negative regarding future interest rate cuts by the Federal Reserve (Fed), leading equity markets around the globe to slide deep into the red midweek.
Inflation in Germany sped up for a second month in a row in May. The German Consumer Price Index rose by 2.8% when compared with the same month a year earlier, faster than the 2.4% rate in April and higher than economists’ expectations. Inflation data from the euro area is due out on Friday before the ECB – which has a 2% inflation target – announces its monetary policy decision next week. Market participants expect the central bank to begin lowering interest rates, but a pick-up in inflation could slow the pace of further rate cuts.
Exacerbating worries that the ECB could be on a slower-than-expected path for rate cuts were strong wage increases out of Germany. Workers in Europe’s largest economy received 3.8% higher wages in the first quarter of the year. Wage increases put more money in the pockets of consumers and more spending could slow the pace of easing inflation in Europe. Following the release of German inflation and wage data on Wednesday, yields on German government debt reached their highest levels in about six months. The Euro Stoxx 50 dropped 1.3% and Germany’s DAX closed the mid-week session 1.1% lower.
In New York, stock indices dropped on Wednesday. The release of the Fed’s Beige Book had little effect on markets, which were already concerned about the timeline for interest rate cuts by the Fed. The Dow Jones Industrial fell 1.1% and the S&P 500 dropped 0.7%. The Nasdaq-100 also lost 0.7%.
In individual stocks, ConocoPhillips agreed to acquire Marathon Oil for roughly USD 17 billion. The move follows similar acquisitions last year by peers Exxon Mobil, which took over Pioneer Natural Resources, and Chevron, which bought Hess. ConocoPhillips shares slipped 3.1% and Marathon shot up 8.4% on Wednesday.
In the Asia-Pacific region, stock markets followed Wall Street down. In Tokyo, the Nikkei 225 slumped 1.6% and South Korea’s Kospi dropped 1.3%. In Australia, the S&P/ASX 200 fell 0.6%. Hong Kong's Hang Seng Index lost 1.3%, while the Shanghai Composite was trading 0.5% lower. On Friday, a string of data out of Asia could swing markets with industrial production figures due from Japan and South Korea, as well as the official Purchasing Managers Index from China. Tokyo inflation data is also set for release on Friday.
Corporate news in focus: Quarterly figures from Costco.
Economic data in focus: Swiss trade balance, Swiss gross domestic product, euro-area business and consumer survey results, US gross domestic product, US weekly initial jobless claims, US existing home sales.
Global economic and market trends at a glance
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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.
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Reference regarding analysis history
If this analysis was made available to any issuers mentioned in the publication prior to its distribution or publication, no changes were made to the price or rating after the issuer’s feedback. Important references for Liechtenstein can be found in articles 3 to 6 FinMV [Financial Analysis Market Abuse Ordinance], for Switzerland in the Swiss Bankers Association Directives on the Independence of Financial Research, and for Austria in section 48 BörseG [Stock Exchange Act], the Austrian analysis principles of the Österreichische Vereinigung für Finanzanalyse und Asset Management [Austrian Association for Financial Analysis and Asset Management, ÖVFA] and the Austrian Society of Investment Professionals (ASIP) and the Standard Compliance Code of the Austrian banking sector. A history of all ratings and recommendations is available at your LGT relationship manager.
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Our analysts draw on publicly accessible information we consider to be reliable. For the compilation of the analysis, publications by domestic and foreign media and news services (e.g. Reuters, Bloomberg, VWD etc.), business publications, trade publications, statistics and rating agencies were used, together with information from the issuers of the analyzed securities – mainly via the Internet, but also in writing or by telephone. We also procure information from investment banks (sell-side research and primary research).
Reference regarding valuation rates
Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.
Explanation of investment recommendations for stocks
We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).
Reference regarding share valuation basis: The analysis compiled by LGT Bank (Switzerland) Ltd. are essentially based on secondary research relating to fundamental and quantitative analysis. Generally accepted valuation methods (valuation multiples, return figures, sector comparisons, comparisons with past valuations etc.) are used for this. The forecasts for the quantitative analysis are prepared with the help of mathematical-statistical procedures (see statements above concerning the analysis tool “theScreener”). Economic indicators such as interest rates, currencies, commodity prices and assumptions relating to the economy are included in the overall assessment. The mood of the market also affects the company valuation. Moreover, many of the approaches are based on estimates and expectations that may change quickly and without warning, depending on developments specific to the industry. Therefore, the recommendations derived from the analysis can also change accordingly. The investment judgements generally refer to a period of 6 to 12 months. However, they are also subject to market conditions and represent a snapshot of the situation. They may be achieved more quickly or more slowly or be revised upwards or downwards.
Explanation of investment recommendations for bonds
We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.
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Definition of rating categories of S&P and Moody’s which are relevant for us:
AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates
For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.
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All selected third-party funds are subjected to a thorough quantitative and qualitative analysis process prior to inclusion in the LGT FundGuide. Selected third-party funds are also subject to a continuous monitoring process. Austria: Investment decisions should only be made on the basis of the current KIID and valid prospectus following consultation with an expert.
Country-specific information
LGT funds: The current full prospectus, the Key Investor Information Document (KIID) and the current annual and semi-annual reports can be obtained free of charge from the fund administrator and from the following addresses: Liechtenstein: LGT Bank Ltd., Herrengasse 12, FL-9490 Vaduz and as an electronic version at www.lafv.li; representative for Switzerland: LGT Capital Partners Ltd., Schützenstrasse 6, CH-8808 Pfäffikon; main distributor and paying agent for Switzerland: LGT Bank (Switzerland) Ltd., Lange Gasse 15, CH-4002 Basel; paying agent in Austria: Erste Bank der österreichischen Sparkassen AG, Am Belvedere 1, A-1010 Vienna.
This recommendation was prepared by LGT and not by an independent financial analysis department. Therefore this recommendation does not meet all the statutory requirements for guaranteeing the impartiality of financial research. The Swiss Bankers Association Directives on the Independence of Financial Research do not apply to this recommendation. Investments in structured products entail a wide range of risks. Investment decisions should therefore only be made on the basis of the valid prospectus or complete documentation following consultation with an expert. This does not constitute financial analysis within the meaning of the Liechtenstein Ordinance on the Preparation of Financial Analysis according to the Law against Market Abuse in the Trading of Financial Instruments.
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