Dax 30; Ftse 100; SP 500 - Market View

[psaTrading]

Despite the heavy losses suffered by Wall Street and the uncertainty in Asia, European markets are expected to remain resilient, at least at an early stage. In any case, investors are still nervous and sentiment is still particularly fragile. Developments in China in recent months raise a number of issues that shake the convictions that investors had before the summer. In addition, some investors are wondering if falling stock markets worldwide will not be a sign that the world economy will enter a slowdown phase. While these doubts are not dissipated, the market will continue to seek a balance, a process that usually translates into higher volatility.

 

[psaTrading]

In the pre-opening, European equities were trading higher, favored by the strong appreciation of Wall Street and the relative stability of the Asian session. It is not excluded that the standard of yesterday’s session to be repeated today. Yesterday, there has been a remarkable over-performance of the indices of Central Europe comparing to their Iberian counterparts. The reason for this trend is related to the fact that Central Europe’s economies have greater exposure to China than countries like Spain, Italy and even Portugal. Apart from exports, several German companies and other Central European countries have factories in China, which increases their dependence to this country. Today will take place the meeting of the ECB, which will have less interest than usual. The main point of interest will be the update of the economic projections. Since June’s projections, the situation in Greece became less unstable but the slowdown of the Chinese economy has become more evident. The ECB estimates that the GDP of the Eurozone grow 1.50% in 2015, 1.90% in 2016 and 2% in 2017. Some economists expect the ECB to revise downwards their projections for inflation (0.30% in 2015 and 1.50% in 2016 ). At the press conference, held at 13:30 it will be interesting to see if Mario Draghi will weave any comments on the impact of instability in China in the Eurozone economy.

 

[psaTrading]

In the pre-opening, European shares traded lower, as a result of the fall of Asian stocks and the publication of the employment report in the US could instill some caution in European investors. The impetus given yesterday by the words of Mario Draghi to the European equity markets, which signaled the possibility to increase and extend the debt purchase program, it risks being temporary. Because of the August events in China and also in emerging markets, the fears of investors fell in the situation of the global economy (and especially the impact of China on the recovery of the Euro Zone) and more recently in future steps of the Fed. These are two themes in that the power of the ECB’s influence is quite limited.

 

[psaTrading]

In the pre-opening, European equities were negotiating with some valuations. The volume should be lower because of the US stock market holiday. Even considering this factor and given the relative stability of Asian markets, it is not excluded that the volatility is lower than that seen in recent weeks. Technically, as DAX remain at higher levels than 9930, the recovery which began on August 21 remains valid. Importantly, if the current recovery continues, it is expected to be very volatile in nature and short term. Investors face many uncertainties for now, fact that prevent the stock markets to find stability at the medium term. For these reasons investors should not exclude downward movements.

 

[psaTrading]

In the pre-opening, European equities were negotiating with some valuations, which could be an important clue in face of the disappointing indicators of the Chinese economy. These negative data did not cause a significant shock to Asian stocks, resilience which should spread to European markets. Metals were another asset that initiated a rise in the Asian session. Therefore, it is expected that, at least in the early hours, mining shares to extend the climb initiated yesterday, led by Glencore and Antofagasta, two securities listed in London. Against this background, it is not excluded that as noted yesterday, the Indexes of Central Europe present an over-performance against its Iberian peers.

 

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[psaTrading]

Asian markets closed with strong valuations, especially the Nikkei, which reached the highest daily value since 2008. This record increase is primarily explained by three reasons, the first is due to the stability that the Chinese stock markets showed in the last two sessions, the second relates to the promise of Prime Minister Shinzo Abe to reduce the IRC at 3.30% next year and last, before the previous factors, many investors who held selling positions may have been induced to close them . Meanwhile in China, the Shanghai and Shenzhen exchanges were animated by rumors that recent indicators of the Chinese economy may force the Beijing government to adopt fiscal measures in order to curb the economic slowdown.

 

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European equities opened lower, penalized by the reversal of Wall Street after the European close and the weakness of Asian markets in today’s session. The disappointing data in China and Japan should penalize mining, industrial and automotive shares, which yesterday had led the ascent in the Old Continent. The lukewarm reaction of investors to the new products Apple will constrain some European Technology its suppliers. Among these companies figure the English ARM Holdings who Apple is the main customer.

 

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Yesterday the already fragile emerging markets suffered a small storm with the reduction of Brazil’s rating by Standard & Poor’s. Moody’s, which reduced the rating of Brazil a month ago, assigns a rating to Brazil to a junk level, while Fitch put the country’s rating just two levels above that category. If any more of these agencies reduces the rating of Brazil to junk, many foreign institutional investors (such as the American pension funds) may be forced to sell Brazilian debt because their statutes prohibit them from holding bonds with a speculative rating. Following the decision by Standard & Poor’s the real depreciated against the dollar, while the Bovespa suffered in the initial phase, some selling pressure. Financial markets and the currencies of other emerging markets also traded in decline and the selling pressure also affected the shares of several European companies (Unilever, Carrefour, Galp, Banco Santander, etc.) exposed to Brazil. More relevant is the impact that this may have in the Brazilian economy and reflexively in other emerging economies. At a time when China is slowing and many emerging economies are struggling, Brazil’s situation worsens this whole context. Crises in emerging markets in 80’s and 90’s teach that if we reach a breaking point in any one of them, the domino effect in other countries is particularly quick and sharp.

 

[psaTrading]

In the pre-opening, European shares traded with modest variations. The first hours of trading should be dominated by the alarming signs from China. Investors from the old continent shall observe its impact on the sectors most exposed to the Chinese economy (mining, automotive, industrial, etc.) and will monitor its reflection in the price of raw materials and the behavior of other emerging markets. After absorbing the reaction to economic data in China, markets will be marked by expectations of investors regarding the Fed’s meeting, on Wednesday and Thursday. The banking sector can be highlighted after Reuters announce that 12 of the largest European banks have agreed to indemnify institutional customers in 1885 M.USD to finalize a case involving charges of malpractice in credit default swap market.