The results of UBS officially inaugurate the earnings season of the European banking sector. Today, the IMF announce its economic forecasts for 2018. This event is taking place in Davos, Switzerland, where the World Economic Forum will begin tomorrow. This event, attended by politicians, economists, CEOs, central bank presidents, among others, is generally a precious source of insight and opinions from people with a potential to influence the global political-economic environment.
Since December 2012, the US debt limit has been reached and since then the State has operated through a series of legal and accounting subterfuges, without having a budget as such. As time goes by the efficiency and duration of these subterfuges is becoming smaller and it will be important that this problem find a more structural solution.
Yesterday, the main catalyst of the rally were the good results of Netflix. Not only did profits exceed estimates, but the number of subscribers to the company’s media services was much higher than forecast (8.33 million versus 6.39 million). Netflix shares appreciated 10% and boosted the other technology titles that in turn served as the engine for the rest of the market. Not taking any notice of Netflix’s bottom line, the market appears to be going through a phase where investors do not need economic or financial drivers to buy stocks. Positive feeling finds stimuli in itself.
In the uncertain context of recent days, the Hong Kong stock exchange has been a notable exception. This market continues to be used by many global investors as a good way to expose themselves to the Chinese stock markets. In addition to several companies from this country being listed in this market, in the last decade China has become the main economic and commercial partner of this autonomous region, making its companies more interconnected with those of the continent.
Following the close of European stock markets, the US market was trading lower, with investors cautious about rising sovereign bond yields. In the absence of relevant business results, attention was focused on the disclosure of economic indicators.
The Euro rally begins to show some signs of fatigue. A short-term correction may be in progress. A fall below 1.2365 may not imply an immediate appreciation of the European indices if in the US the main indexes begin to show signs of fragility. Often, the devaluation of the Euro translates into a mere overperformance of the markets of the Old Continent vis-à-vis its American counterparts.
It should be noted that of the companies belonging to the S&P 500 index, 80% reported numbers above expectations and 81% beat estimates in terms of revenues. In terms of economic indicators, the ADP employment report showed that 234 000 jobs were created during January, well above the expected 185 000 but below the previous 250 000 observed in December.
Last week the USDCAD fell with a wide range and closed near the low of the week, in addition the currency pair managed to close below the previous week low, which suggests a strong bearish momentum.
Wall Street traded lower on the day the job report was known. The environment was characterized by a rise in yields on sovereign debt and the reaction to business results released yesterday after the closing of three major companies: Alphabet (Google), Amazon and Apple. The employment report showed that 200 000 jobs were created during January, more than the expected 180 000. Salaries rose 0.30%, in line with expectations. These data boosted yields on Treasury Bonds, with 10-Year Treasury Bonds reaching the highest of the last 4 years. Regarding the reaction of technology companies that reported their results yesterday, Apple and Alphabet were downgraded, while Amazon was gaining ground, having already reached a new record high. Of the companies belonging to the S&P500 that have so far submitted their quarterly accounts, 78% exceeded forecasts and 80% exceeded estimates in terms of sales.
The epicenter of the weakness in the stock market lies in the bond market and more precisely in the rise in yields. Only now, and after months of upward trend, stock market investors are beginning to wake up to the potential detrimental effects that rising yields can cause. In a phase of high nervousness, any event can aggravate investors’ sentiment.
Once the first negative reaction is over, and in a purely technical and short-term perspective, it can not be excluded that stock markets can start a recovery. World stocks may be favored by the fact that yields have reached levels that are technically called overbought.
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Normally, after a steep decline like the one observed in the previous sessions, markets tend to fluctuate quite volatile not only because the fall forces investors to restructure their portfolios but force them to reshape their outlook on the stock market situation. At this stage investors’ sensitivity to events and news is extreme, so their reaction to these factors could be somewhat exacerbated, thus contributing to the remain of high volatility.05072/141
Deutsche Bank has published an interesting study on how S&P reacted after the 10 biggest VIX rises. Thus, on average, the S&P appreciated 3.90% in the week following the occurrence of these increases. However, S & P lost an average of 0.40% in the following month and 2.60% in the following three months. Yesterday’s rise in sovereign interest rates is explained by the lower buyer interest that the 10-year bond auction raised among investors and the news that the two parties in Congress have reached an agreement to fund the American state with 300,000 M. USD over the next two years. This measure is expected to aggravate the US public deficit, thereby putting pressure on its yields. A further sharp rise in state interest rates would have a negative impact on equity markets. The second variable relates to the volatility and financial engineering products indexed to it. The third relates to fund withdrawals.
This point is particularly relevant as there is a relevant difference between the decisions taken by investors and decisions resulting from an automatic algorithm. Investors tend to assess market conditions before submitting their orders, so in the absence of purchases a number of these investors are likely to wait for market normalization. On the other hand, the automatic programs generally act solely and exclusively according to the algorithms with which they have been programmed that will be able to integrate the market conditions or not. As a result, many of these programs will be able to sell even when purchase orders are at much lower levels than the last quote.
As it did last week, the evolution of American markets should dictate course and sentiment in Europe. Another issue that global investors will be debating is the growing tension between Israel and Syria. On Saturday, Israeli aviation carried out several attacks on the border separating the two countries, and Syrian forces reinstated, shooting down an F-16. The civil war in Syria has been the scene of the intervention of two superpowers (US and Russia) and various regional powers (Iran, Turkey and now Israel), all pursuing different goals. Thus, the possibility of an incident between these actors is a real threat. Added to this scenario is the war in Yemen, the dispute between Qatar and several Arab countries, making the Middle East one of the most delicate and unstable regions on the globe. Considering that the region is also the largest oil producer in the world, then any negative event has the ability to boost crude oil prices. In recent sessions, oil has suffered sharp losses due to strong sales by hedge funds.
On Friday US markets ended up in a session that was again marked by high volatility, thus completing the worst week for stock markets since January 2016. During the session, the S&P ranged from a loss of 1.80% to a appreciation of 2.10%. The magnitude of the S&P oscillation becomes sharper when compared to the fact that in 2017, the American index recorded about 150 consecutive sessions with oscillations of less than 1%. The day was totally dominated by market factors, which replicated the movements of the previous sessions. During the day, there were some selling associated with automatic programs and the foreclosure of positions held by investors who had resorted to financing to buy stocks. Also during the day, there was a buyer interest, a bit hesitant, but that prevailed in the last half hour of the session. The recovery at the end of the day is positive, but it is still not enough to assert, always with a dose of uncertainty, that marked the end of the recovery. It was not yet possible to identify who were the buyers who conducted the indexes to positive territory in the last part of the day. There is an aphorism on Wall Street that indicates that markets never touch the lows on Fridays. However, from a technical point of view, for a recovery to gain a more solid and lasting dimension, it would be important for the S&P to close, with a strong volume, above 2638 (which corresponds to Friday’s high).
With the positive performance of the banking sector, the US market recovered from the initial losses. This negative performance at the opening was spurred by the publication of data on inflation relative to the first month of the year. The consumer price index rose 0.50% in January (the highest increase in the last 5 months), up from the 0.30% expected by economists. In relation to the same month of the previous year, inflation remained at 2.10%, but exceeded the expected 1.90%. On the other hand, the so-called core inflation (which excludes the most volatile goods and is the most considered) also surpassed the estimates, when it stood at 1.80% in relation to the same period of 2017. As far as wages are concerned, quite relevant in recent times, there was an increase (adjusted to inflation) of only 0.80%. Retail sales for the same month were also known, which fell by 0.30%, the biggest drop in almost a year and compared to an estimated increase of 0.20%. If we exclude car sales, retail sales have remained unchanged.
The US market was trading higher, with indexes trying to reach a series of 5 consecutive days in positive territory. Attentions have been focused on macroeconomic indicators. Yesterday the data on inflation were announced and today the number of weekly applications for unemployment benefit has been published, which increased from 7,000 of the lows of the last 45 years to 230,000. In the business field, Cisco Systems was advancing more than 3% after having reported results higher than the estimates. For the first time in more than two years, the company has seen an annual increase in revenues.
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In the United States, the recovery initiated in the last 5 sessions and that has allowed the recovery of the market after the recent correction, remained on this last day of the week. Today’s macroeconomic agenda has been filled with some relevant indicators. Regarding the real estate market, the houses under construction during the month of January registered a 9.70% increase, above the expected 3.50%, as well as construction permits which also showed a very favorable evolution (7.40%) and surpassed the expectations that pointed to a zero variation. On the other hand, the consumer confidence index, as measured by the University of Michigan, stood at 99.90, against the expected 95.50.