Trading Journal

In the pre-opening, European shares traded with some losses. The reverse of the trend of Wall Street on Friday should dictate investor sentiment at this early stage. The technology sector and pharmacist should be more sensitive because of the US biotech sector weakness. In Madrid, investors will react to election results in Catalonia. This region accounts for about 20% of the Spanish GDP. With 7.5 million inhabitants (of 46.7 million), GDP per capita is the fourth of the country (after Madrid, the Basque Country and Navarra), the unemployment rate of 19.10% against the national average of 22.37%. Catalonia is Spain’s most indebted region of the country (66 180 M. €).

Investors continue to focus on the ramifications of the Volkswagen situation (in the US has been dubbed DieselGate), in the automotive sector and in the German economy. In the near future, the new CEO Matthias Muller, will have to address several points. The first is how to deal with the 11 million vehicles (which may possibly be more) that were sold and did not meet the standards of CO2 emissions. The second is related to various lawsuits which begin to be brought against the company. The third relates to the reaction of many governments, the first was the Swiss that banned the sale of the related models. The fourth is the threat of some rating agencies cut the credit rating of VW debt, which would increase the company’s borrowing costs and reflect the leasing costs and financing of car buyers of the brand. But probably what most alarmed investors is the impact that will have on the German economy. According to the Ministry of Economy of this country, the automobile sector is, directly and indirectly, approximately 10% of GDP. In addition, some investors fear that this case compromise the good name and reputation that German industry has in the world.

European markets have opened up, reflecting the good performance of the Asian markets and the stabilization of the price of raw materials during the session in that region, however this can be a technical reaction to accumulated losses in recent days. The initial rise should be led by the most penalized sectors in recent days, as the industrial, mining and automobile. The Chinese government halved the tax on small cars. This measure benefits more local brands than European automakers. Today will be the closing quarter, a period that is seasonally favorable to equity markets. To change investor sentiment will be necessary that this recovery will extend for a few days and be accompanied by high volume. The trading volume in index or stock is an excellent barometer of the conviction of the buyers at a time when the market is in an upward movement. Using the DAX as a sample of European markets (despite the case of Volkswagen), only if this index overcome 9750/9790 (preferably with volume) is that it may be considered a sustainable recovery.

The recovery from yesterday and its continuation today, may not be sufficiently compelling to calm investors as uncertainties remain (situation of the world economy and the monetary policy of the Fed).

Global economy is a mess this days. China and emerging market even the European market are slowing down and the U.S domestic market is the only market showing signs of strength.

The employment report was clearly disappointing. Not only job creation has undergone a sharp slowdown as well as wages have remained unchanged does not constitute an inflationary pressure. So in terms of monetary policy, this data further complicated the mission of the Fed and does not fit clearly the conditions for a rise in interest rates in December, increasing the uncertainty in relation to the timing of the first increase in rates directors in the United States. After an initial fall in response to labor market data, the markets staged a very strong recovery. The rally was led by sectors that had previously been more penalized: mining, oil and biotechnology. It may be pointed out some reasons for this behavior. The first is that the weakness highlighted by the employment market has caused a devaluation of the dollar and as a result there has been an appreciation of commodities, which boosted mining and oil sectors and the industrial reflection. As usual, the biotechnology sector showed a fairly high volatility but ended the session with 3.40% gains. The strong recovery of the US indices is a positive sign from a technical point of view, it is important to check if it will continue in the coming days.

Asian markets closed with some gains, which could perhaps have been more significant considering the rally held by the American indices. Today was signed the Trans-Pacific Partnership, an agreement between the US, Japan and over 10 economies of the Asia-Pacific region, which aims to promote free trade between these countries. This agreement is very important not only for the duration of their negotiations (5 years) as it involves countries that account for about 40% of world GDP.

The trade balance registered a deficit in August well above the estimated (48300 M.USD vs 42500 M.USD), while imports increased 2.60% and exports declined 2%. This fact limits the GDP growth in the 3rd quarter. In addition, the fall in exports, especially to emerging economies, may signal that American companies have suffered a fall in revenue in some areas of the globe. This is particularly relevant in the given moment as is approaching the earnings season.

In recent sessions there has been an appreciation and overperformance on assets with higher risk. This pattern does not mean that the risks that hit the market during the months of August and September have disappeared. It was the perception of investors in relation to these issues that has changed. Perhaps now investors believe that the Chinese GDP growth will slow down (to about 6%) but not collapse. On the other hand, in relation to US interest rates, investors begin to discount that its growth will only occur in 2016, so it is no longer so much uncertainty. Therefore, in the short term, one should not exclude a retreat of the major global indices but this correction will only be a natural movement after the strong gains of the last few days and should not represent a new change in investor sentiment.

The medium-term outlook for the equity markets have become more encouraging in the short term but there is a possibility of a correction after the strong gains achieved in recent days.

The beginning of the European session shall be dominated by factors specific to certain firms. Glencore announced that it will divest two mines, one in Chile and another in Australia, a decision which falls within the target of a 10 000 M. USD debt reduction. In the sector of foodstuffs, the Belgian-Brazilian takeover of Anheuser-Busch InBev on English SAB Miller remains the main theme. Reuters reports that the brewer AB Inbev can raise its offer for SABMiller. RWE and E.On have been the worst performers in the DAX this year (-52% and -36%) due to the uncertainty regarding the closing costs of their nuclear plants.

Many investors begin to anticipate that the ECB will announce a new phase of the debt purchase program. Based on a study of Standard & Poor's, some investors estimate that the quantitative easing program will reach 2400 000 M € and extends until the end of 2018.

Any rally towards the end of the year would come from China’s government doing more to stimulate the economy

The earnings season of the US banking sector continues today with the presentation of quarterly accounts at Bank of America and Wells Fargo. In the last quarter, Bank of America managed to surpass analysts’ forecasts due to lower legal expenses to the extent that the institution was ending their lawsuits. Now, it is important that the Bank of America manages results through an increase in its activity. With regard to Wells Fargo, its core business is the provision of housing loans, making it less dependent on the evolution of capital markets.

The automotive sector should capture the attention of investors, after some data on this industry have shown that the strong demand observed in Germany contributed to the sales increase in September, so it was registered the 25th consecutive month of growth in the European Union.

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Good stuff.

US markets extended their recent rally, managing to finish on high for the 3rd consecutive week. Despite the oil drop and the results that have been presented have not been very exciting in terms of revenues, most of the S & P sectors closed higher. One reason for the Friday climb was the need for many fund managers follow the rise of the benchmarks. Another reason was the fact that the S & P have overcome a major area of resistance of 2020, which triggered purchases of many quantitative models of trading. Despite these reasons, the earnings season continues to be the main topic on Wall Street.

During this week, some members of the Central Bank will intervene in financial events and will be interesting to see if they will repeat the rhetoric of Fed (an increase of interest rates in December) or will wave to the weakness of some economic data.

The Earnings Season remains the central theme. This Season has been marked by the high percentage of companies providing higher than estimated profits (about 74%) in opposition to a worrying proportion (60%) of companies reporting lower revenue than estimated. While profits depend on various factors (sales, costs, supplies, accounting rules, etc.), revenues depend primarily on demand for goods and services that businesses provide. Such demand depends on the degree of activity of the economies in which they operate. As such, the weakness of the American multinational sales are an alarming sign about the state of the global economy. Still, investors have shown a complacent attitude towards this standard.