Dax 30; Ftse 100; SP 500 - Market View

Asian markets had a relatively quiet session, ending with contained variations. Today begins the main event of the week and perhaps of the year - the Chinese Communist Party Congress. This congress is held every five years and its main objectives are to elect the party hierarchies and establish the general guidelines of the country's internal and external policies. The holding of the Chinese Communist Party Congress should not have an immediate impact on the financial markets (except for some relevant surprise) but will have profound political, economic, social and military consequences not only in the region but also in the world.
 
European markets closed with devaluations of less than 1%, at a time when business results remain on the agenda. The technology sector was influenced by the selling pressure seen by US companies after the news about iPhones 8 orders. SAP remained broadly unchanged. The German technology company reported lower-than-expected earnings and quarterly revenues, but still improved its forecast for total revenues in 2017. Tele2 was the top-earning operator in the telecoms business, fueled by news that the operator raised its outlook for profit for the third quarter. On the other hand, Carrefour and Pernod Ricard also registered significant increases after the two companies recently presented their results. However, Unilever penalized the respective sector (household goods and personal care), after having reported a growth for the quarterly sales of 2.60% compared to the anticipated 4%. This differential was due to climatic factors such as hurricanes in the USA and the heavy rains that hit Central Europe. Nestlé lost 0.89%, despite announcing a quarterly increase of 2.60% in sales, slightly higher than the estimated 2.50%. On negative ground was also the advertising company, Publicis, in reaction to the results below expectations.
 
On Friday, the US market opened up, favored by the positive expectation regarding the tax reform. In fact, the Republicans were able to approve their proposal for the public deficit for fiscal year 2018. The Dow Jones has already renewed an intraday high, boosted by the positive performance of shares of Cisco Systems, American Express and JP Morgan. Shares of PayPal, a member of the S&P500 index, rose about 5 percent after the company reported quarterly results above expectations.
 
In the pre-opening, the European indices did not show a definite trend. In fact, in the last week most of the European indices have fluctuated over a relatively narrow range. In the preceding weeks the possibility of a short-term correction was anticipated as several technical indicators had reached extreme levels not seen for several years. This correction did not materialize and the recent consolidation of the indexes contributed to a decline in these technical indicators. These indicators remain at high but not extreme levels. Technically, the DAX is trading between 12900 and 13100. A break from the top of the range would signal, from a technical point of view, a continuation of the upward trend of the last quarter. A break in the bottom of this range would increase the probabilities of a short-term correction.
 
One issue that may gain greater weight in the coming sessions is the influence that the bond market may have on stock markets. Yesterday in the US, 10-year yields in the US exceeded 2.40%. Since April 10-year interest rates could not exceed 2.40%, which has served as a barrier to any rise. However, with the passage of the Senate deficit law and with the increasing likelihood that John Taylor will be named the next President of the Fed, there has been an upward pressure on yields. Most likely, it will only be after the ECB’s meeting tomorrow that it will be possible to see whether yesterday’s movement in US yields signals the beginning of a medium-term upward trend. If this happens, not only does it increase the likelihood of a generalized rise in US yields, but it may also spill European yields. Evidence of this contagion will be given when the 10-year Bunds yield exceeds 0.50%.
 
Asian markets closed mostly with contained gains. The only exception was the Nikkei that ended with reduced devaluations, disrupting a series of 16 consecutive positive sessions, something which never occurred before. In fact, the previous record was 14 consecutive positive sessions and had been observed in the 1960’s. A very generous fiscal policy coupled with an ultra-accommodative monetary policy has attracted several buyers to the Japanese market. At the domestic level, many private investors and pension funds have been exchanging bonds for shares, while foreign investors have once again chosen the Japanese market as their favorite in the region.
 
Yesterday US markets had their worst performance since early September. This nicely describes the period of weak volatility markets are experiencing: the worst S&P performance since September 5 is a mere 0.47% drop. In a first view, we may be inclined to point out the poor results reported as a cause of yesterday’s retreat. In fact, companies from different sectors such as Boeing, Chiplote Mexican Grill (restaurants) and Advanced Micro Devices (technology) announced results that did not satisfy investors, leading to a fall in their respective shares which slightly cooled optimism over the Earnings Season. However, yesterday’s decline reminds us that stock markets do not always go up: stocks move in cycles, in waves and not in a straight line, so yesterday’s move is perfectly normal in stock markets.
 
The ECB’s decision fell within the expectations already outlined in the preview of this event. In summary, the ECB will:
• Reduce, from January onward, the monthly purchases of 60 000 M. € to 30 000 M. €.
• The asset acquisition program will run from January 2018 through September of that year.
• The ECB will reinvest the repayment of the obligations that will mature into new debt issues, so the monthly amount of purchases should exceed 30 000 M. €.
• Interest rates will remain at current levels even after the end of this program.
In reaction to this decision, the Euro devalued itself (the message, although expected was not severe enough to inspire a new appreciation of the Euro), which favored European stocks. Another factor adversely affecting the common currency was the generalized decline in yields, especially in Southern Europe (the most favored by ECB purchases).
 
One factor that has supported the European stocks, especially the more cyclical ones, has been the retreat of the Euro. Technically, the main support of the European currency is located in the 1.1470 area. However, if the Euro starts trading above 1.1660, the likelihood of a short-term recovery becomes more robust.
 
With respect to the domestic market, the Commerce Department reported that the US economy grew 3% in the third quarter, surpassing economists’ forecasts of 2.50%. If we exclude the “inventories” effect, GDP grew by 2.30%.
 
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