Ger30, UK100 and SP500 are CFD’s, written over the Dax30, Footsie100 and S&P500 Index futures:
In the pre-opening, European indexes traded up, recovering part of yesterday’s losses. The publication of the Fed minutes generated various effects that we should analyse. Reconsidering the possibility of an increase in interest rates in the US in June or July, global investors triggered a chain reaction in the various financial markets. The first consequence of the prospect of an increase in interest rates was a generalized rise in US interest rates in the bond and money markets. With this increase becomes more attractive hold dollars because they are remunerated at a higher interest rate than the Euro and the Yen (two currencies with a perception of risk almost identical to the US dollar). But the appreciation of the dollar makes the purchase of commodities (whose price is expressed in US dollars) more expensive for European and Asian buyers. On the other hand, with the appreciation of the dollar (depreciation of the Euro) becomes more competitive European exports, which could mitigate the negative effects mentioned. However, the appreciation of the US dollar increases the debt (expressed in euro) of many emerging countries as well as their inflation (because imported goods are more expensive). Some of these countries (such as South Africa and Brazil are in a phase of economic contraction, which can not be tackled by the respective central banks to the extent that they can not reduce interest rates because of rising inflation. The rise in interest rates and US yields increases the attractiveness of bonds of this country when compared to the stocks of utilities and other more defensive securities with a high dividend yield. The increase in interest rates in the US decreases the present value of profits companies will generate in the future. This current value is calculated by the division of the value of estimated future profits for an interest rate. By increasing the denominator decreases the value of future profits and as such the fundamental value of companies. In this context, the banking sector is an exception. The rise in interest rates increases the differential between interest rates on loans and interest rates on deposits, which has a positive impact on the margin of the banks. This effect does not guarantee a valuation of US bank shares (or European banks present in the US) but may lead to an over-performance compared to other sectors.
American indices closed with some losses, although at distant levels of the session lows. The day was marked by the aftermath of the minutes of the Fed that forced investors to reassess their expectations for the future of US interest rates. Yesterday, the Governor of New-York Fed, which can be considered the most important member of the Central Bank after Janet Yellen and his Vice President Stanley Fisher, reaffirmed the possibility of an increase in interest rates in the summer, if the economy confirm the expectations of the Fed. In this context, the meetings in June, July and September are the possible dates. Currently, money markets assign a probability of 60% to an increase until September compared to less than 30% last week. Thus, investors returned to scrutinize carefully all indications on the state of the economy. The number of weekly claims for unemployment benefits fell by 16,000 last week to 278,000. Estimates pointed to the 275,000 applications for unemployment benefits. The activity index of the Philadelphia Fed stood at -1.8 in April, compared with 4.80 expected. On the other hand, leading indicators of the economy recorded an increase of 0.60% in May, against the estimated increase of 0.40%. Walmart posted good results that served, at least in the short term to alleviate the fears for the sector and for domestic consumption. Walmart reported an EPS of 0.98 USD and revenues of 115,900 M.USD, surpassing not only the revenues achieved in the same period of 2015 as analysts’ forecasts, both in terms of sales and in terms of profits. Even in mature markets like the US, the company reported good results. For the current quarter, Walmart projections are higher than the average of analysts.
Asian indices closed with some gains, partly due to the recovery of oil and other raw materials after the losses suffered yesterday.