a decrease in volume shall occur due to the expectation surrounding the ECB meeting today, which is taking place in Valetta (Malta) and is expected to be the main event of the day. Investors will try to find in the words of Mario Draghi the confirmation that the ECB will be available to adopt new measures of monetary stimulus.
Mario Draghi is a skilled manager of expectations and an excellent communicator with the financial markets, even to have a greater effect than the disclosure of corporate results and economic data.
The almost vertical rise in European equity markets after the ECB’s intention to extend the quantitative easing program and the decision by China’s central bank to cut interest rates put the European indices at extreme levels of overbought. The performance of these two central banks is not a surprise being expected by investors and by economists, so it is not to exclude a short-term correction but that does not invalidate the positive medium-term trend.
According to a statistical study conducted by Asbury Research, the last week of October is usually, since 1957, the worst stock market week of the 4th quarter and one of the worst of the year.
The meeting of the Fed will be the main event of the day and perhaps of the week. Economists do not anticipate any increase in the reference rate. Attention will be focused on meeting announcement and publication of the minutes a few weeks later. In relation to the Fed executive committee, opinions are considerably divided. Regional Governors, 8 out of 12 are in favor of an increase in interest rates in December. From the other members, Janet Yellen also advocates an increase in December as well as its Vice-President, although it has shown some reservations. Two governors advocate the maintenance of interest rates until 2016. Thus, Fed’s emerges a picture something divided by Janet Yellen, whom to keep the tradition of decisions based on consensus, will have to develop in the coming weeks a conciliator role within the Executive Committee with a basis to raise interest rates later in the year.
In short, yesterday’s Fed statement challenges the prevailing perception in the financial markets (and especially monetary) that there will be no increase in interest rates before the year end, which had been one of the catalysts rally in stock market indices in October.
The statement from the Fed lead investors to focus again on major economic issues. The US economy suffered a sharp slowdown in Q3 to grow only 1.50%, significantly less than the 3.90% observed in the previous quarter. Estimates of economists pointed to an increase of 1.60%. However, this variation is less serious than it appears. The economic slowdown was mainly due to the sharp fall in inventories (almost 50%). This effect is equivalent to about 1.44% of the economy. This is likely to be temporary in that, depleted inventories will need to be replenish in the coming months, thus making a positive contribution to GDP.
With today’s speech the Governor of the San Francisco Fed (John Williams) at a conference organized by this institution starts an intense week of speeches among the Central Bank members. Among the various interventions, the focus is on Janet Yellen on Wednesday. Statements by members of the Fed will help investors define their expectations for the next meeting of the Central Bank in December.
The technology sector may benefit from the Nasdaq that have approached the maximum of the last 15 years.
In China, investors reacted with enthusiasm to the PMI index, which have reached 52.0 in October, the maximum of the last 3 months. Furthermore, the positive sentiment was reinforced by the words of President Xi Jiping. The President of China stated that the annual growth of the country will not be lower to 6.50% over the next five years. Additionally, it was revealed that the President of the Central Bank of China wants to establish a closer relationship between Shenzhen and Hong Kong exchanges, which will enable greater access to investors resident in the latter square the Chinese stock market.
American indices closed lower, due to the oil drop, the words of Janet Yellen and dynamism shown by some economic data. The price of crude has been hit by rising reserves in the US, in line with the estimated and also the strength of the dollar. The testimony of Janet Yellen on the finance committee of the House of Representatives focused mainly on the US financial system. The Fed’s President said that should be made improvements to the risk management and also in what concerns the compliance in the largest banks and regional institutions, which will induce the central bank to adopt rules on this matter. For interest rates, said an increase in December is “a real possibility” although it depends on the evolution of the economy.
Traders boosted bets that the Fed will raise rates next month after the labor report.
It is difficult to find any weaknesses in Friday’s employment report. Thus, the odds of an increase in interest rates rose to 70% compared to 58% the day before and 39% from the end of October.
It’s quite likely that there will be a relatively “traumatic event” in global markets once the current period of low interest rates comes to an end.
Investors will now focus their attention to the intervention of Mario Draghi at an event organized by the Central Bank of England at 13:15.
A factor that marked the session was the weakness of oil. Yesterday it was reported that off the US and China are dozens of supertankers with about 100 million barrels on board. The cargo of these ships belong often to commodities trading companies awaiting the rise of crude price to sell the barrels they hold.
Oil continues to suffer the pressure generated by solid evidence of an oversupply and strength of the dollar. Yesterday, the US Department of Energy revealed that last week the oil reserves of the country increased by 4.2 million barrels instead of the 790 000 estimated.
Because of these tragic events can not be excluded that investors will take on a greater geopolitical risk in their investment decisions in the oil market.
The central theme of the current situation is the monetary policy of the Fed. Since the publication of the employment report for October, the currency markets gave a high probability of a rise in interest rates at the December meeting (currently 70%). This week will be published two key indicators that will allow us to have a clearer vision of what will be the decision of the Central Bank in December (The minutes of the last meeting of the Fed and inflation).
I dedicated this whole thread to this topic:
http://forums.babypips.com/forextown/76191-next-stock-market-crash-imminent.html
I also talked about a FTSE100 7-year cycle, with 2001, 2008, and 2015(t.b.c.) as peaks:
I have been short the FTSE100 since it broke the 6,000 mark on 26th August, so nearly three calendar
months, and it is starting to abandon hope to resurge…
Given the S&P500 slump, and oil’s slump back toward $40, I think the FTSE100 has only one way to go:
South.