Market View; World Stock Indexes & Trading Journal - page 16
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The European Indexes consolidate after yesterday’s strong recovery . The Central Bank of Switzerland (SNB) used to prevent the CHF to appreciate in order to protect the competitiveness of Swiss exports . To achieve this objective, the SNB sold CHF and bought Euros in the foreign exchange market. However, this strategy has become expensive and did not catch the influx of foreign capital to the country, which constituted a buying pressure on the CHF. If the ECB implement a quantitative easing program, the selling pressure on the euro would be increased, forcing the Swiss central bank for increased efforts to prevent the appreciation of their currency, with little chance of success. In deciding to abandon this objective there has been a strong appreciation of the CHF, which immediately penalized Swiss equities as investors anticipate the negative impact on the competitiveness and profitability of Swiss companies. After the initial negative reaction, the European markets achieved sharp gains, motivated by the prospect of an increase of EU exports to Switzerland. Switzerland is the second largest destination for European exports after the US and ahead of China. The present moment is particularly delicate and turbulent, since next week we will have the meeting of the ECB (Thursday) and the Greek elections (Sunday). Today will be published the final reading of inflation in the Euro Zone in December. Economists estimate that the price level has decreased 0,20%, reinforcing deflation spectrum and increasing the pressure on the ECB.
The European indexes started the week trading high with the positive expectations for the ECB meeting next Thursday (22 Jan). These expectations should overlap to some risks hanging over the European markets since increase the odds of the adoption of a sovereign bonds buying program by the ECB. Although the program’s scale is still unknown, there were two indications that the ECB will act. The first was the assent by the European Court of Justice for the purchase of debt by the ECB under the OMT program (Outright Monetary Transactions). This assent is extended to a debt purchase program from the perspective of quantitative easing, thus rejecting the objections of the German Constitutional Court. The second clue was the abandonment by the Swiss National Bank (SNB) of the fixed exchange rate of the Swiss franc (CHF) against the Euro. This decision was taken considering that the ECB will adopt a quantitative easing program, which would make the SNB’s currency strategy unsustainable, in that it would be forced to buy very large amounts of Euros. However, over the horizon hover some threats.
The European indexes closed slightly higher and were in consolidation throughout the day. At this stage, European investors are more focused on the ECB’s Thursday decision than in the cooling signs of the global economy. Today in Beijing, the IMF reduced its forecasts for global growth. For 2015 this institution estimates a growth of 3.50% and 3.70% in 2016. In October, the IMF projections pointed to increases of 3.80% and 4% respectively. As the World Bank, the IMF pointed to the slowdown in the Eurozone, China, Japan and some emerging countries (including oil producers) as the main reason for cutting their estimates. These should also reduce the positive effects that the oil drop will take in energy-dependent countries such as those in Western Europe. The IMF decision is reinforced by the reading of China’s GDP, which indicated that the economy grew at the slowest pace in 24 years. The prevailing belief in the market is that the ECB will announce its sovereign debt purchase program. This belief was reinforced yesterday by the French President indiscretion that clearly stated that the ECB would go that way. Now, for investors the unknown is the program amount and its mode of action. While these issues do not find answers, many investors increase their exposure to the market, fearing to lose the positive effects that the ECB’s decision could have on the stock market.
The European Indexes climbed. The expectation of tomorrow’s ECB meeting dominates the feeling of European investors. Today starts the World Forum in Davos, an event that brings together many politicians, economists and top investors, it is therefore an opportunity to gauge their perspective on the world economy. The slowdown in China’s economy is one of the issues, as is one of the causes for the cut in global growth estimates for this year. It is not excluded that some of these politicians to wave the ECB meeting tomorrow, which could have an impact on the course of stock market indexes.
The Stock market rose after a three-day rally in the SP500 Index, as banks and transportation companies posted better than expected earnings. The session was marked by the European Central Bank’s announcement (ECB) that will adopt an expanded stimulus plan, including government and corporate bonds of 60 billion euros per month. The purchase will continue until September 2016. The announcement was made after the ECB maintained the reference rates unchanged at record levels.
Stock markets traded up. Investors continue to try to assess the impact of the ECB’s decision announced yesterday. In which extent the equity markets had not incorporated this decision, what are the sectors that most benefit from the acquisition of bonds and their effects in different economies, etc. The Central Bank announced that it will acquire 60 000 M. € monthly of debt instruments (mainly government bonds). The ECB will purchase a total of 1,080,000 € M. of debt instruments, over 18 months, starting in March. This is slightly higher than what was known early yesterday by some rumors. The ECB’s decision reinforced the downward movement of the Euro. This trend has justified the over-performance of stocks from export companies. Another factor that attracted the attention of investors was the publication of the final reading of the PMI activity index (Purchasing Managers Index) for the euro zone which averaged above estimates. A slight improvement over December but not strong enough to dispel fears about the European economy.
The European equity markets started the session trading low but climbed throughout the day, reaching new highs. Investors are preparing for another intense week, with continued earnings season in the US and in Europe and the first meeting of the Fed this year. At the macroeconomic level, the publication of the sentiment index of German business, the IFO, showed a slight improvement achieved in January. In the second half of 2014, this index has been falling before the repeated signs of slowing down not only in Germany but also the Eurozone. Another factor which may gain some weight is the rebirth of the tensions in eastern Ukraine, to the extent that in recent days there have been several armed conflicts in this part of the country. The fall of crude oil can create some selling pressure in the sector of oil shares, as should benefit the airline stocks, chemical companies and automakers. The latter sector has been one of the most favored by the fall of the Euro against the dollar and other currencies. 2014 was the first year since 2007 that saw a rise in car sales in Europe, with major CEO optimistic this sector for the current year, not only by the dynamism of the domestic market and the competitive advantage that the Euro has enabled us foreign markets.
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The European stock markets started the session with slight gains. The beginning of today’s session was influenced by some corporate results. Briefly, Roche reported lower annual results to estimates and the proposed dividend (8 CHF) was also lower than the market anticipated. The Swedish retail chain H & M reported higher quarterly results than expected and was confident in relation to the January sales. The European technology sector should respond positively to Apple’s results. The American company is an important customer of several European companies, such as the English ARM. At the end of the session, it is not excluded a decline in trading volume, reflecting the expectations of investors in relation to the meeting of the FED.
The Fed kept the outline of the statement of December. The central bank reiterated that it will continue to adopt a “patient” posture with regard to the standardization process of monetary policy and thus, if all factors remain unchanged, interest rates should not be increased in future meetings. Regarding inflation, the statement said that the increase in the price level has fallen and that this trend will intensify in the short term but in a broader time horizon prices are expected to increase at a faster pace, due to the improvement of labor market and decreasing temporary effects of oil fall. The FED withdrew the words “for an extended period of time” when it ruled on the maintenance of low interest rates. Another change from the December statement relates to the assessment of the economy. The FED believes that the US economy is growing at a “solid” pace instead of “moderate” as mentioned in the previous statement. Contrary to what occurred at the December meeting, the statement was approved unanimously, although it is important to note that recently the Central Bank Committee had some changes, with new members more conducive to an accommodative monetary policy than their predecessors. This event has generated an upward movement of the indexes for a few minutes before investors focus on the price of crude. Oil traded again under pressure after the US Department of Energy has reported that US oil reserves increased 8.84 million barrels last week more than 4.3 million barrels anticipated by economists. With this change, US crude oil reserves reached the highest level since 1982, when it began to be recorded in a systematic way. The crude oil price fall caused a selling pressure on the oil sector, which quickly spread to other sectors. In this harmful effect of oil joins the strength of the dollar, which penalizes revenues of US companies held in foreign markets (which represent about 30% of the total). These factors have raised the concern of investors. The worrying signs of coming earnings season are clearly evident in the good results from Apple. About 120 companies in the S&P500 have reported their quarterly accounts, generating an increase of 8,000 M. USD in profits over the previous year. From the total increase of 8000 M.USD, 5000 M.USD were generated by Apple.