Market View; World Stock Indexes & Trading Journal - page 29
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The source for the recent weakness of the raw materials is related to the oil price drop (which often anticipates the cycles of other commodities) justified by the intention of Iran to increase production by 2 million barrels, the recent rise in dollar and by ongoing evidence of a slowdown in China's economy.
On the 14th of July after the agreement between Greece and its creditors, there was the question of the impact of this understanding in the equity markets. Before Greece forcibly take the leading role (in late April), the DAX traded between 11800 and 11900. The day before yesterday, the DAX index reached these levels. European markets perhaps need new catalysts to allow them to approach to the maximum of the year. Among these possible factors include a renewed depreciation of the Euro, the continued improvement in the economic situation in the region, the good business results, etc.
US markets closed lower, penalized by the disappointing results of some leading companies such as Microsoft, Yahoo! and Apple. It was the latter company to condition investor sentiment, given its influence on the activity of several technology companies. Still, the market managed to contain the impact of the fall in shares of Apple (-4.23%). Microsoft’s shares fell 3.68% and Yahoo’s fell 1.23%. Despite the disappointing results of these companies, most US companies continues to exceed analysts’ forecasts. Yesterday, before the opening, Coca-Cola, Boeing, EMC and Campbell Soup announced results that beat estimates. At the macroeconomic level, the real estate market continues to give momentum signals. In June, sales of existing homes hit the 5.49 million units (annualized number), which corresponds to the maximum of the last eight and a half years. This exceeded the estimates of economists, confirming that the housing market is in an expansion phase and can benefit from higher wages, greater availability of credit but assuming that credit rates to housing remain unchanged. Today, it is one of the most intense days of the earnings season with about 50 companies in the S & P500 to report their quarterly accounts. At a time when some uncertainties remain in the global economy (due to the slowdown of the Chinese economy, the crisis of some emerging economies and the still modest recovery in the Eurozone), the results of Caterpillar and 3M may give important clues about this matter. These companies have a high exposure, exporting their products to all over the globe and in the case of 3M, its product range is so wide (about 55,000), that its activity is a reliable sample of the worldwide industry.
The European indices started the session with some gains. The session will again be dominated by the presentation of results on both sides of the Atlantic. Good numbers from Amazon may give some encouragement to the European technology sector. The mining sector may continue to register a underperformance due to the selling pressure on the commodities that has characterized the Asian sessions. In addition, Anglo American reported a 30% fall in half-yearly profits, trying to compensate shareholders by paying a dividend of 0.32 GBP. To these factors must be added the warning signs of the Chinese economy. Air France reported a higher profit than expected, keeping the projections for 2015. Danone announced a result roughly in line with the anticipated but sales growth was stronger than expected. In turn, BASF announced an EBIT that was lower than expected. Banco Sabadell announced profits that topped forecasts.
Investor sentiment was influenced by company results and also the weakness of commodities. Conditioning the markets were some leading companies like Apple, 3M, Microsoft (among others) which presented disappointing sales, the very cautious outlook for some companies in the future, profits not based on increased sales but repurchase programs of own shares and cost cuts. The fall in the price of raw materials has not only an impact on the producing economies (such as Brazil, Australia and South Africa) as signals that economic activity in the consuming economies (notably China and other countries Asian) is slowing. Investor’s fears were reinforced on Friday with the release of China’s PMI index, which showed an unexpected decrease, remaining in a contraction phase. To the hypothetical weakness of some economies power up the strength of the US dollar which reduces the value of earnings generated in foreign markets. Despite macroeconomic concerns, the data that were released during the session had a diminished role in the course of the main indices. Sales of new homes fell by 6.80% in June to 482,000, the slower pace of the last 7 months. Predictions were for 550,000.
The present situation confirms the evidence of slowdown in China and the stagnation of some emerging economies such as Brazil and South Africa. The copper (copper), whose cycles anticipate with some precision the economic cycles, lost 26% in the last 12 months. In this context, the US economy appears as an oasis. Orders for durable goods grew by 3.40% in June, exceeding the 3% estimated by economists. This indicator is strongly influenced by aircraft orders. In June, Boeing received an order for 161 planes, after the Air Festival of Paris-Le Bourget. In May, orders were only 11. The recent losses in the mining and industrial sectors, encouraged by the fall in the price of raw materials and the instability of Chinese financial markets, led these sectors to extreme of oversold levels.
The lower volatility of Asian markets boosted US equities. The rally was led by the mining and oil sectors, which had been the most penalized by falls in Chinese stock markets and commodities. The rise may also have been influenced by the closure of vendors positions by the so-called fast money (short-term investors) before the meeting of the Fed.
The Fed was sparse in nominations and no major changes from the previous meeting. The Central Bank says that the economy continues to grow moderately, recognizing the improvements seen in private consumption and the housing market. With regard to the labor market, a key part of monetary policy at the current juncture, the Fed brought greater focus to define how solid progress as well as reducing the unemployment rate. Only to exports and investment the statement pointed to some slowdown. Inflation remains away from the long-term objective (2%) due to falling fuel prices and some imported goods. By failing to provide clear indications, the Fed set aside some room for maneuver in relation to the time it decides to normalize interest rates. A rise in interest rates until December is assigned a probability of 57%. Until January this probability rises to 74%. These expectations contrast with the opinion of 80% of the economists, who before the meeting, expected an increase in rates already without September. After bending 0.20% observed in Q1 (the result of some non-recurring factors), economists estimate that GDP grew 2.50% in the 2nd quarter. This period is a kind of antechamber of the 2nd half, when the Fed estimates an acceleration of the economy.
US markets ended without major fluctuations, with the session to be marked by macro and micro-economic factors. The publication of yesterday’s economic data confirmed the Fed’s optimistic view on the US economy.
The most cyclical sectors may present a under-performance due to disappointing data in China. During the European debt crisis, the Chinese market was an important rewarding element for many European companies which in the domestic market were penalized by the economic downturn. Today, the Greek Stock Exchange will reopen after being closed for more than a month. Marked losses are foreseen at an early stage. Since the closing of the Athens stock exchange, an ETF, listed in New York and that replicates the largest Greek companies, lost 17%.