Stock Markets – Daily Note

The European markets started the session with sharp gains. The catalyst for the initial rise is the unexpected decision by the Bank of Japan, which increased its annual program of debt acquisition from 590 000 M USD to 726 000 M USD.

While the Fed’s monetary policy has been the main driver of equity markets, the Bank of Japan also starred in an important role in creating liquidity. At a time when the Fed and the Bank of England are starting to reverse the course of their monetary policy, the decision of the Bank of Japan is an important step to counter the decrease in liquidity generated by those two institutions.

The final reading of inflation in the Euro Zone will be released today. Economists estimate that inflation has recorded in October grew 0.40%. Although the effects of the ECB’s measures has only impact on the level of prices in the coming months, if inflation is lower than estimated, it may have a negative impact on investor sentiment.

US markets were boosted by corporate earnings, positive reading of GDP and operations related to the end of the financial year of some institutions.

The US economy benefited from rising exports and a sharp drop in imports, particularly oil, which was explained by the increasing crude oil production in the country. Moreover, the huge increase in military spending boosted public spending and affected GDP by reflex.

US indexes were also positively influenced by the fact that yesterday (just like today) represent the end of the financial year to several investment funds and pension funds. Generally, these periods are positive for stock markets.

Stock Markets – Daily Note

At the beginning of today’s session in Europe markets started the session slightly higher to reverse within the first hour of trading. Investors react to the announcement of the Fed’s meeting yesterday and to the results published this morning.

The US markets closed yesterday without major fluctuations. The Fed meeting was the main event of the day and caught little enthusiasm that had come to cheer investors in previous days.

The Federal Reserve’s decided to end its asset-purchase program, which had begun in September 2012 and which was one of the drivers of the equity markets during this period. According to a release, the interest rates will remain at low levels for “an extended period of time”, but data showing faster-than-estimated growth is fueling speculation the economy is strong enough for the Federal Reserve to raise interest rates next year.

While acknowledging the improvements that the US economy reached after the financial crisis, the Fed has always anchored its decisions to the state of the labor market, which it’s recovery was during a period, less pronounced than the rest of the economy.

The Central Bank recognizes the recent improvement in the labor market and that this progress will influence their decisions.

One of the factors that contributed to the ultimate recovery of the US indices were the positive trend of this earnings season.

Despite the falling oil prices, the CEO’s of the oil companies have proven to be confident about the future, which is important at a time when investors interpret the drop in crude oil as a sign of economic slowdown.

For the US economy, economists estimate on average, an increase of 3% of GDP, based on increased consumption and investment as well as an expansion of exports contrasts with containment of imports. At this stage, the US economy appears to be unique among the principals, going through a phase of solid growth.

Stock Markets – Daily Note

European markets experienced a significant recovery yesterday. The recovery of the European Indexes was related with the perception that European companies have achieved good results.

US markets were driven by good business results on both sides of the Atlantic. Despite all the fears about the global economy, US companies are daring to record better earnings season this year. In fact, from the 208 companies in the SP500 that have reported their accounts 72% beat forecasts. Economic data, including a breakdown of durable goods orders, the lowest growth in house prices and the rise in consumer confidence had a limited impact on the session.

The FED meeting will be the main event of day as well of the week. The agenda include the program of debt acquisition and the outlook for the interest rates.

Asian markets closed higher, boosted by the strong performance of European and US shares. In Japan, it was announced that industrial production rose 2.70% in September, beating estimates of 2:20%.

Plunge in Oil Prices

Yesterday, Crude Oil listed in New York, reached the minimum of the last two years (Prices fell below 80 USD a barrel). The supply / demand ratio has been destabilized by increased production in the US and the decline in demand for crude because of the slowdown in many economies. For the oil sector, the fall of oil prices to below 80 USD affect the profitability but also the sustainability. According to some analysts, shale oil production price lies for some oil companies between 70 USD and 80 USD a barrel, so if crude continues down these companies will start to make losses. The additional problem is that the shale oil  industry has been one of the biggest job creators in the US in recent years.

It seems a price war may be coming to oil producers. It does appear possible that Saudi Arabia would start a price war with U.S. shale.

LCrude Weekly chart:

STRESS TESTS

At the beginning of today’s session in Europe, the first reaction of investors to the stress tests was positive.

Yesterday, the results of the stress tests, prepared by EBA (European regulator of the banking sector) in cooperation with the ECB and the AQR program were disclosed.

The AQR (Asset Quality Review), the responsibility of the ECB consists of a review of asset quality and ability to absorb losses. 123 European banks were submitted to stress tests and 130 European banks to the AQR program. The stress tests are a series of simulations of how certain scenarios would have an impact on the level of European capital position, the risk sensitivity and exposure to sovereign debt banks.

The AQR revealed how banks are calculating the risks of their assets. Stress tests disallowed 25 European institutions, but only 13 of these have to strengthen their capital, in that the other already made ​​during the year.

The total capital required by the institutions who failed these tests amount to 24 600 M.€.

Markets – Daily Note

BASF reported higher gains and higher operating income than estimations but reduced its projections for 2015 due to the economic situation in the Eurozone.

Ericsson announced a profit that matched analysts’ estimates and reported revenues that surpassed.

Banking shares traded volatile as investors position themselves before the publication of the results of stress tests of the ECB. These results have been preceded by many rumors but some Italian and Greek banks may not pass.

The news of a new case of Ebola in the USA increases the negative psychological impact, which may penalize the airlines.

American markets remain high and the main drivers were the good results of some relevant companies.

At a time when the markets arise in relation to the state of the global economy, the results of Caterpillar and 3M (two cyclical companies with high global exposure) gain increased importance.

SP500 – Current Situation

The resistance zone of 1937 points, at the index SP500 was broken today. This level coincides with the Fibo Level of 61.8% from the previous correction. This can confirm the bullish trend of the recent months.

The barrier of 1,950 points is a very important resistance level and was also broken today, i.e., half an hour to the closing of the European session.

The markets recovered from yesterday’s retracement, with gains in Caterpillar Inc. and 3M Co. which exceeded analysts’ estimates. The information released today about the PMI (Purchasing Managers Index) signaled a stronger European economic growth.

Caterpillar, the largest maker of construction equipment, rose 5.1% after raising its profit forecast for the full year with an increase in sales of construction machinery in North America. 3M rose 5.7%. Tractor Supply Co. rose 15%, the most significant rise in the SP500 index.

The presentation of good results by relevant companies and better macro data, helped to feed the confidence of investors.

SP 500 Daily chart: