At the moment, the Volkswagen scandal has not affected economic activity in Germany and it is too early that watch possible impacts originated by the attacks of Paris. The effects of terrorist attacks can only be evaluated in the coming months. However, for some sectors, such as tourism and transport, the consequences are already visible. According to the union of hotels and restaurants, last week in Paris revenues in bars and restaurants fell 44% and the occupancy rate of hotels was only 57%.
In Shanghai prudence prevailed since the new IPO’s will may lead many investors to sell shares in order to participate in such operations.
In recent weeks, the DAX has overperformed compared to its European peers. The main reason for this behavior is related to the weak expression that mining and oil companies have in the German index. The overperformance has been based on the good performance of more cyclical stocks such as chemical, automotive and industrial companies. Favoring these sectors is the fact that the Chinese slowdown have already been incorporated in the outlook of investors and the weakness of the Euro. However, in the short term, falling European currency begins to reach extreme levels, so it is not to exclude the possibility of a more technical recovery. If such a scenario materializes, the overperformance of the DAX may be interrupted.
US markets ended without major fluctuations, with the Dow Jones recording the lowest intraday variation of this year. During the first phase of the session, investors reacted to various economic data. After the reaction to economic indicators, many fund managers prepared for the Action Day of Thanksgiving that will usher in a prolonged weekend, to the extent that on Friday the session on Wall Street will be shorter, so many investors are away from their trading rooms. Today is Thanksgiving Day, which is celebrated every year on the fourth Thursday of November.
Yesterday, US markets were closed, to celebrate the Thanksgiving Day. Today, the session will be shorter, ending at 18h00 (GMT). The day is called Black Friday, which marks the official start of the Christmas Season sales, which coincides with the most profitable period of the retail chains. In recent years, with the expansion of online sales the importance of Black Friday has been losing some importance for Cyber Monday. At the economic level, the Christmas sales is usually a good barometer of the mood of American consumers and as such are one of the factors that influence the equity market during the month of December. Purchases during this period are accompanied almost daily by analysts and are fairly disclosed in the financial media, by conditioning the performance of stock markets. The Association of American retailers estimates growth of 3.50% of sales compared to the same period last year. At the Statistical level since 1928, the S & P appreciated by 68% of the time during Black Fridays, with an average rise slightly less than 0.27%.
This week will be particularly intense, with the completion of the ECB meeting on Thursday and the publication of the employment report in the US the next day. These two events are preceded by the release of other economic indicators, in an environment marked by high geopolitical risk. This environment of uncertainty should result in greater volatility. However, given what happened in recent weeks, economic issues should overlap to the terrorist threat in Europe and geopolitical tension lived in Turkey and Syria. One big question is whether the majority of European investors has positioned itself in relation to the expected announcement of measures by the ECB. Since the attacks of Paris, the DAX has appreciated 6% and 4% the Eurostoxx 50. In the currency market, the Euro lost since that date 1.50% as investors anticipate a greater supply of Euros as a result of an even more expansionary policy of the ECB.
At sector level, mining shares may be highlighted by positive due to the appreciation in the price of various metals in the Asian session, which should ensure the FTSE100 one overperformance due to the weight that these companies have in the English index.
American indices closed higher, boosted by some consumption data and seasonal factors. Yesterday were published Cyber Monday sales that surprised by the positive. Given the same Monday last year, online sales grew 16%, a growth rate higher than the 12% estimated. This variation reassure many investors who had been concerned about the disappointing sales in stores and shopping centers. Another variable that inspired buyers is that December is traditionally a positive month for equities. Generally, the pattern of this month is characterized by an initial rise during the first week, followed by a correction and a rally at the end of the month.
The ADP report showed that the private sector created 217,000 jobs in November, beating expectations for 190,000. The creation of jobs relative to October was revised upwards from 182,000 to 196,000. In these two months, the main driver of employment were small and medium enterprises focused on services. Although the correlation between this indicator and the official employment report (to be published on Friday) is not high, it is likely that the latter shows that the labor market remains dynamic. If this scenario is confirmed, the last obstacle to a rise in benchmark rates at this December meeting may have been removed.
Before the joint committee of Congress (Senate and House of Representatives), Janet Yellen reiterated its confidence that the US economy is recovering, based on the improvement of the labor market and the factors that are limiting inflation should diminish in next year.
In the short term, it is not inconceivable a reversal of the trends of recent months, and the American stock market indices could register a over-performance compared to the European.
Recent issues related to the Fed and the ECB relegated to the background the economic situation in China. Despite the measures taken by the Chinese authorities in recent months, the economy continues to show signs of weakness and it’s not already visible which is the magnitude of the slowdown or the extent to which the Beijing government has the situation under control.
The reaction to Chinese economic data, which point to numerous weaknesses should mark the beginning of today’s session. The economic situation in China not only affects several European companies such as oil prices. Early this week, the fall in the oil price (Brent reached on Monday the lowest price since 2009) has been the main theme of the equity markets. In addition to the negative impact on the oil, mining and industrial sectors, the decline in oil prices affect the perception investors have of the world economy. The fall in crude oil price results in part from weakness in demand, which in turn reflects the economic slowdown in some parts of the globe. Moreover, the descent of the oil has another side effect. Crude oil is the main income of many Middle Eastern states and is the foundation of its social policies, usually quite generous. For example, the cost of extraction in Saudi Arabia is less than 10 USD / barrel but to finance its social programs the oil has to negotiate somewhere between 80 and 90 USD / barrel. With oil trading near the 40 USD / barrel, the Saudi kingdom and other Gulf states had to find other sources of financing. Thus, the sovereign funds of these countries have started to sell the assets held abroad. According to the Financial Times, in the 3rd quarter, Arab sovereign funds made at least 19 000 M.USD in redemptions of assets. The real amount is higher to the extent that many investment funds are not required to disclose the transaction of SWFs. According to the Financial Times, in 2015, Saudi Arabia has sold 70,000 M.USD in assets from their fund that manages 670 000 M.USD. In conclusion, if the weakness of oil persists, the equity markets will have to continue to absorb this selling pressure.
The weakness on Wall Street and European markets weighed on Asian indexes. The most affected stock exchanges were Tokyo and Sydney. The Chinese stock markets, whose correlation with the US and European markets is not high, also suffered some selling pressure. Additionally, there are some concerns in the Chinese markets in relation to the high number of IPO (initial public offering) of about 670 companies, despite the new rules adopted to soften its impact. Usually, investors sell shares they hold in order to participate in these IPO.
The decision of the Chinese central bank to favor a devaluation of the Yuan may have a negative effect on European exporters sectors such as automotive and industrial.
Before the meeting of the Fed (Tuesday and Wednesday), the attention of investors will be focused on the evolution of crude oil and commodity prices. Broken the barrier of 37 USD / barrel for oil prices, the selling pressure on the equity markets intensified as previously projected, since it stimulated more short selling in oil, mining and industrial sectors. However, the selling positions either in oil or in these sectors is reaching very high levels, which may feed a short-term technical rebound, as these investors may suddenly quit their positions, thus fueling the upward motion.
Generally, the pattern of this month is characterized by an initial rise during the first week, followed by a correction and a rally at the end of the month. So far, it can be assumed that this pattern is repeating itself, only missing its most interesting part: the year-end rally.
The session will be marked by the expectation of today’s meeting of the Fed. If nothing significant occur regarding oil prices, investors will adjust their portfolios to the US Federal Reserve meeting. Whereas many investors had set up short positions (sellers) in the equity markets (and particularly the most vulnerable sectors such as oil and mining), it is possible to occur a buying pressure, as these investors may close their positions.
The more cyclical sectors and more dependent on the weakness of the Euro (such as automotive, industrial, etc.) should register a over-performance. In terms of indices, the DAX is the most benefited from the weakness of the European currency. The mining sector recorded a sharp appreciation in the Asian session but if such a move be extended during the European session, the recovery is likely to be volatile and once again dependent on oil prices.
The decision of the Central Bank started a new cycle in US monetary policy. For six years, benchmark interest rates remained at historically unprecedented levels in a range between 0% and 0.25%. Now, with the increase decided on Wednesday begins a new upward phase of the interest rate, which is supposed to be more gradual than the previous. Typically, increases in interest rates are considered unfavorable to equity markets. However, the history of stock markets reveals a different pattern.