Dax 30; Ftse 100; SP 500 - Market View

[psaTrading]

Following the close of European stock markets, the US market was trading lower, with investors cautious about rising sovereign bond yields. In the absence of relevant business results, attention was focused on the disclosure of economic indicators.

 

[psaTrading]

The Euro rally begins to show some signs of fatigue. A short-term correction may be in progress. A fall below 1.2365 may not imply an immediate appreciation of the European indices if in the US the main indexes begin to show signs of fragility. Often, the devaluation of the Euro translates into a mere overperformance of the markets of the Old Continent vis-à-vis its American counterparts.

 

[psaTrading]

It should be noted that of the companies belonging to the S&P 500 index, 80% reported numbers above expectations and 81% beat estimates in terms of revenues. In terms of economic indicators, the ADP employment report showed that 234 000 jobs were created during January, well above the expected 185 000 but below the previous 250 000 observed in December.

 

[psaTrading]

Last week the USDCAD fell with a wide range and closed near the low of the week, in addition the currency pair managed to close below the previous week low, which suggests a strong bearish momentum.

 

[psaTrading]

Wall Street traded lower on the day the job report was known. The environment was characterized by a rise in yields on sovereign debt and the reaction to business results released yesterday after the closing of three major companies: Alphabet (Google), Amazon and Apple. The employment report showed that 200 000 jobs were created during January, more than the expected 180 000. Salaries rose 0.30%, in line with expectations. These data boosted yields on Treasury Bonds, with 10-Year Treasury Bonds reaching the highest of the last 4 years. Regarding the reaction of technology companies that reported their results yesterday, Apple and Alphabet were downgraded, while Amazon was gaining ground, having already reached a new record high. Of the companies belonging to the S&P500 that have so far submitted their quarterly accounts, 78% exceeded forecasts and 80% exceeded estimates in terms of sales.

 

[psaTrading]

The epicenter of the weakness in the stock market lies in the bond market and more precisely in the rise in yields. Only now, and after months of upward trend, stock market investors are beginning to wake up to the potential detrimental effects that rising yields can cause. In a phase of high nervousness, any event can aggravate investors' sentiment.

 

[psaTrading]

Once the first negative reaction is over, and in a purely technical and short-term perspective, it can not be excluded that stock markets can start a recovery. World stocks may be favored by the fact that yields have reached levels that are technically called overbought.

 

[psaTrading]

Normally, after a steep decline like the one observed in the previous sessions, markets tend to fluctuate quite volatile not only because the fall forces investors to restructure their portfolios but force them to reshape their outlook on the stock market situation. At this stage investors’ sensitivity to events and news is extreme, so their reaction to these factors could be somewhat exacerbated, thus contributing to the remain of high volatility.

 

[psaTrading]

Deutsche Bank has published an interesting study on how S&P reacted after the 10 biggest VIX rises. Thus, on average, the S&P appreciated 3.90% in the week following the occurrence of these increases. However, S & P lost an average of 0.40% in the following month and 2.60% in the following three months. Yesterday’s rise in sovereign interest rates is explained by the lower buyer interest that the 10-year bond auction raised among investors and the news that the two parties in Congress have reached an agreement to fund the American state with 300,000 M. USD over the next two years. This measure is expected to aggravate the US public deficit, thereby putting pressure on its yields. A further sharp rise in state interest rates would have a negative impact on equity markets. The second variable relates to the volatility and financial engineering products indexed to it. The third relates to fund withdrawals.

 

[psaTrading]

This point is particularly relevant as there is a relevant difference between the decisions taken by investors and decisions resulting from an automatic algorithm. Investors tend to assess market conditions before submitting their orders, so in the absence of purchases a number of these investors are likely to wait for market normalization. On the other hand, the automatic programs generally act solely and exclusively according to the algorithms with which they have been programmed that will be able to integrate the market conditions or not. As a result, many of these programs will be able to sell even when purchase orders are at much lower levels than the last quote.