Stock Markets – Daily Note – 31May

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 fluctuations. After the gains achieved in recent weeks, it is likely that investors take a more expectant approach considering the various events in the coming days. Among them are the macroeconomic indicators in the US, the meetings of the ECB and OPEC. In sectoral terms, the stocks of the automakers should attract the interest of investors. The recovery of commodities in the Asian session could result in a over-performance of the mining and oil sectors. In Italy, the banking sector should take the leading role after the Atlante fund (created through the participation of various financial institutions) have secured the capital increase of the Veneto Banca, a regional bank. Atlante fund was created in order to recapitalize the Italian banking and resolve bad loan problems. However, some analysts question its ability as this institution have a capital of only 4250 M €.

US markets were closed yesterday, having celebrated the Memorial Day. Over the next few days investors will scrutinize the various economic indicators to be released in the US in order to determine if the Fed has arguments and conditions to raise interest rates. Almost all members of the Fed stressed the dependence of the performance of the Fed to the development of the economy. The April meeting minutes stood out not only this dependence as well as the confidence that the economy will accelerate after growth of only 0.80% in the 1st quarter of this year. Among the various indicators that will be reported this week stand out inflation linked to household spending, the ISM manufacturing activity index and the employment report. Today it will be published inflation associated with household expenditure (the favorite indicator of the Central Bank). Economists estimate an increase 0.30% due in large part to the recent rise in fuel. However, for the Fed, the most relevant is the core version, that is, inflation which excludes the most volatile goods such as fuel and food. This measure reached last month to 1.60% in annual terms. The degree of incorporation in investors’ decisions of the possibility of a rise in interest rates in the US, and as such, is not yet clear the prediction of its reaction to economic indicators to be released. Most global managers have a neutral view on the stock markets, holding a lower exposure to their benchmark indices and having high liquidity (about 5.50% of the portfolio). Despite its neutral stance, institutional investors are very sensitive to changes in stock market indices. If these markets increase their value they will be induced to buy shares to follow the performance of their benchmark. If the equity markets fall should suffer more redemptions, which will force them to use the available liquidity. If this liquidity decline rapidly, these managers will be forced to sell shares to maintain the liquidity.

Asian indices closed with gains, which were particularly significant in China. After a few weeks of under-performance, Chinese stocks were boosted by a Goldman Sachs study that assigns a probability between 50% and 70% of some types of Chinese shares to be included in the MSCI indices. These indices serve as a benchmark for many global managers. So, after being included in these indexes, global managers necessarily have to buy them for their portfolios. In Japan industrial production rose 0.30%, while household spending has retreated to 0.40%.