November 10th, 2013
Q3 Earnings Picture, Speculation on Fed, ECB Policy, The Data Driving It, And THE Big Question Of The Week
by Cliff Wachtel, TheSensibleGuideToForex.com
The following is a partial summary of the conclusions from the fxempire.com weekly analysts' meeting in which we share thoughts and conclusions about the common drivers of major global asset markets: global stocks and the leading stock indexes, forex, commodities, and bonds.
It's a quick summary of last week's stock market action, a review of what moved Asia, Europe, and the US each day, and serves as a quick summary review of last week's global market movers. It's our starting point for our follow up articles on:
- Lessons For The Coming Week And Beyond
- Coming Week Top Market Movers
- EURUSD Outlook
- Related Special Features
You can find all of these here as they come out over the weekend. You can skim it in about 2 minutes, or take a bit more time to study it. A useful weekly summary of what's driving global asset markets.
MONDAY: Mixed Data, Earnings, Interest Rate Speculation Bring Mixed Results
Asia uneventful, EU mixed modestly higher, as the combination of a good China non-manufacturing PMI, EZ manufacturing PMIs and hopes for dovish ECB statement outweigh lackluster earnings. US modestly higher as upward momentum tempered by caution ahead of top tier reports later in the week, including monthly jobs, non-manufacturing PMI, advanced GDP, UoM Consumer sentiment.
- The Bullish: Euro-Zone manufacturing PMIs show expansion except for Greece and France
- The Bearish: Earnings in Europe are mostly missing expectations, and so are top line revenues. US earnings are a bit better but not great, and are also struggling with expanding top line revenues - a key measure of whether earnings are improving due to real growth or not. Thus far much of the increase in sales growth has come from acquisitions rather than improvements in sales from existing ongoing operations.
- The Perplexing: US stocks continue rising in October, with the value of the S&P 500 up 4.5% even though the Q4EPS estimate (an aggregation of the estimates for all 500 companies in the index) dropped 1.5% per FactSet's John Butters.
TUESDAY: Global Indexes Overall Lower On Mixed Earnings Results, Caution Ahead Of ECB, US Services PMI That Jeopardizes QE
Asian indexes mixed with modest moves on lack of market moving news, mixed Asian earnings, and caution ahead of top tier news due later in the US (ISM non-manufacturing PMI), and later in the week from both Europe and the US.
European indexes all down solidly on a batch of additional poor earnings results, as well as uncertainty ahead of the ECB rate statement on Thursday and US non-manufacturing PMI that would come out after 8pm GMT, European markets had closed.
See our post on lessons for the coming week about themes from US and European earnings.
US indexes were modestly lower despite a better than expected ISM services report, evidence of rising home prices in September, a month in which they usually fall. Actually, those positive data points, along with optimistic comments from Fed Presidents on Monday were more likely the cause of the pullback. After all, here on QE planet, optimism suggests Fed tapering sooner, which is bearish.
There was also a report out from Goldman Sachs that predicts no taper until at least March 2013, so perhaps the combination of positive, anti-QE data and a pro QE report balanced each other and that's why we had limited price action. No doubt caution ahead of the big data releases coming, as well as the ECB statement, also helped keep price action subdued.
WEDNESDAY Bullish earnings and Fed taper speculation vs. bearish ECB rate outlook
In Asia Japan up on the influence of strong Toyota earnings, the others were mixed with China and India down, Korea flat, with little news to move on.
European indexes were all modestly higher as bullish impetus from earnings beats from some major names, including the Dutch financial conglomerate ING and personnel staffing firm Adecco, was dampened by caution ahead of the ECB meeting.
US indexes were mostly higher as interest rate sensitive stocks gained on speculation that the Fed would delay tapering until at least March 2014, though the tech-heavy Nasdaq was slightly down 0.20%.
The EUR rose early in the US trading session on a Bloomberg report that the ECB had leaked it would not cut rates. It cited a source saying that the ECB wanted to avoid the Fed's mistakes that confused markets in September and end up appearing like it over-reacts to fluctuations in economic data.
THURSDAY: Markets Drop On Fears Of Inadequate ECB, Fed Support
Almost all major Asian indexes were down on caution ahead of US jobs, GDP reports, and a lack of any positive news to balance that defensive selling.
European bourses were mixed, as the bullish effects of the ECB rate cut were more than nullified by the bearish effects of:
- The ECB statement said nothing about a new LTRO program. That omission caused concern for smaller banks and periphery banks, many of which need an ongoing cheap credit source.
- The big US GDP beat raised the odds that a QE taper would begin sooner than the consensus March 2014-at-earliest view. Realization that Friday's jobs reports would also be influential limited the early taper concerns.
- Caution ahead of Friday's US monthly job reports. If the reaction to the strong GDP figures was any guide, then the big concern was that these too would strongly be expectations and increase speculation of an earlier than expected taper.
US indexes were all down hard, (Dow -0.95% to 15597, S&P -1.31% to 1747, Nasdaq -1.90% to 3857) due to the strong US Q3 GDP reading, 2.8% vs. and expected 2% growth. That's supposed to be good because it implies accelerating economic growth. However US markets plunged because:
First, as noted in our article on lessons for the coming week here, there questions about whether the figure really indicated sustainable growth. In particular:
- Did the spike in inventories (which accounted the difference) suggested rising or falling demand?
- Did the 2% real sales growth figure (which backs out the inventory contribution to GDP) mean growth was still stagnant?
Second, in the US, aka planet QE, if the GDP figure did imply accelerating growth, then the Fed's QE program, the only thing markets believe really counts in keeping stock and other risk asset prices up, might begin to wind down sooner than the current consensus date of March 2014.
FRIDAY Asian and European Markets Down On Fears of US Jobs Report, US Unexpectedly Soars On It
Go figure. Asian and European stock markets correctly anticipated a strong US jobs report, and so after Thursday's "taper phobia" driven selloff in the US following a strong GDP report, they anticipated a similar reaction. However, after an initial selloff, US stocks rallied to close strongly higher. Go figure.
Here are the details
-Asian indexes were mostly down hard -0.6% to about 1% on profit taking driven by caution ahead of the US jobs report. Adding to the caution was how markets would react to the reports, regardless of the result. As Thursday showed, markets can, and will, at times dive on good news because signs of US strength raise fears of an earlier, faster reduction of QE and other stimulus that could lead to (gasp!) higher interest rates.
-European indexes also were also mostly down on Friday, but only modestly, on a combination of:
--Credit rating agency Standard & Poor's (S&P) cut its rating on France by one level from AA+ to AA.
--The initial bearish reaction in the US to the strong October jobs report. This came out at 8:30am EST, or 3:30pm GMT, near the very end of the UK and European trading session. It looked like the US was preparing for another "good news is bad news" type of day, similar to its Thursday dive after stronger than expected Q3 Advanced GDP results raised taper phobia, fear the Fed would cut back its $85 bln/month bond buying (and possibly other) stimulus programs sooner and faster.
-US indexes all closed strongly higher (Dow +1.08% to 15761, S&P +1.35% to 1770, Nasdaq +1.60% to 3919), due to
--A much better than expected jobs report. The US added 204K jobs versus an expected 100k-148k. Part time jobs fell (some questions about that data though), so not only did the report smash expectations, it did so with full time jobs.
--AND a somewhat surprisingly bullish reaction to it - something not to be taken for granted. After Thursday's selloff in the wake of a similarly strong GDP report, it appeared that US markets were view good news negatively on fears it would accelerate a fed stimulus taper and the onset of rising interest rates.
The Biggest Question And Lesson Of The Week
The big question, perhaps the biggest of all from this week, is why the sudden positive reaction to good news on jobs, just a day after a seemingly similar bullish GDP report prompted a taper-phobia driven selloff? There are a number of possibilities, which we discuss in depth in our posts on the coming week, which you can find here.
As the set of representative stock index charts from all three major regions show, the net results for the week and its top market moving events were that:
-US indexes continued their march to new historical highs or held near them
-European indexes also either advanced to multi-year highs or held steady
-Asian indexes remained in a multi-month trading range
WEEKLY LEADING GLOBAL STOCK INDEX CHARTS WITH 10 WEEK EXPONENTIAL MOVING AVERAGE (EMA). LEFT COLUMN TOP TO BOTTOM: S&P 500, FTSE 100 DAX 30, MIDDLE: CAC 40, DJ EUR 50, IBEX 35, RIGHT: NIKKEI, HSI, MSCI TAIWAN
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.