Ger30, UK100 and SP500 are CFD’s, written over the Dax30, Footsie100 and S&P500 Index futures:
In the pre-opening, European indexes traded without major variations. The publication of the IFO index, which measures the mood of German business, is of double importance. The latest German economic data (industrial orders, exports, etc.) have significantly accused the fragility of China and other emerging markets, so the IFO may reveal the extent to which these factors have affected the German Industry. Additionally, the IFO will provide a picture of the damage caused by Diesel Gate of Volkswagen. 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.
Interestingly, at a time as relevant as the earnings season, external factors are the ones to boost US equities. The echo of Mario Draghi’s words and the decision by China’s central bank to cut benchmark rates were the catalysts of Friday’s rally. However, it is important to notice that the effect of the actions of these two Central Banks was confined mainly to stocks not having a significant impact on other risky assets such as commodities. To complete this external positive effect were the good results of Microsoft, the Alphabet (formerly Google) and Amazon. The importance of the results of these companies based on several points. The first is that they are leading companies in the technology sector and as such influence the activity of other technology companies. The second is that they have a high global exposure and the third point is that contrary to the pattern of this earnings season, characterized by higher than estimated profits but disappointing revenues. The question of revenue is alarming, in that its decline has been steady in recent quarters, which over time, can have an impact on corporate profits. In Q1 2015, revenues of the S & P constituents fell 2.90% in the 2nd quarter 3.40% in Q3 (so far) 3.40% and estimates for Q4 point to a decline of 1.90%. If we consider what happened in recent seasons results, these estimates for the 4th quarter may be revised downwards. Today, attention should redirect toward the presentation of results, although it is not scheduled for publication any first-rate company.
Asian markets closed higher, but the reaction to the cut in key interest rates in China turned out to be rather modest. On Friday, the Central Bank of China cut benchmark interest rates of loans from 4.60% to 4.35% and the interest rate on deposits from 1.75% to 1.50%. Moreover, even decided to reduce the reserve requirement for all banks at 0.50%. This was the sixth cutting in interest rates since November. The main surprise of this measure was its timing, not its essence. Given the downturn in the economy and the paralysis of some areas such as construction and real estate was expected that Chinese authorities continued to try to stimulate the economy.