Trading Journal

Among the risks that stock markets face include the decrease for the 4th consecutive quarter of profits of American companies, the questions about the growth of the American economy, the recovery of the Chinese economy, political uncertainty in several countries (UK, Spain, USA , etc.), uncertainty about the future of interest rates in the US and the weakness of corporate bonds of higher risk companies (which have a high correlation with the stock indices).

Although private consumption has been one of the most resilient elements of the US economy in the 1st quarter, its growth is still modest especially in the light of the various positive factors that have favored household income as rising wages, the psychological effect caused by low unemployment, reduced interest rates (to reduce the financial burden), the decline in fuel prices, etc. Thus, the weakness of the retail sector and doubts at the macroeconomic level have spread up to more cyclical sectors, with the exception of the oil sector.

Asian markets closed with losses of more than 1%, explained by the weakness of Wall Street. The declines were particularly marked in Japan due to the appreciation of the Yen. The minutes of the last meeting of the Bank of Japan, whose decision not to adopt more stimulus measures deeply disappointed the market, revealed that the Commission estimates a moderate GDP growth, although lower than previously anticipated.

Asian indexes closed higher, despite the worrying signs coming from the Chinese economy. The economic data in China continue to justify the seizure of investors. On Saturday, it was published that industrial production grew 6% in April, less than 6.50% anticipated by economists. Equally disappointing was the investment in fixed capital, in the same month increased 10.50%, short of the 10.90% forecast. Retail sales, which include some public entities expenses increased 10.10% in April, a lower variation than 10.50% anticipated. As private investment, domestic consumption is one of the priorities of the strategic plan of economic reform in Beijing. These data Relaunch uncertainty entity investors about the Chinese economy. During the month of January there has been a strong economic slowdown but later the data for February and March returned some encouragement. However, the latest April data back to make a bleak description of the Chinese economy. Adding that Reuters reported that during the weekend, the Chinese regulator would have urged, through an official letter, the major banks to increase their provision of credit.

Today is the anniversary of the New York Stock Exchange, which was founded on May 17, 1792, when it was signed the Buttonwood Agreement.

The reason for yesterday’s fall is related to the relationship between inflation, the Fed and economic growth. Inflation, as measured by consumer prices, recorded the largest monthly increase in the last three years (0.40 +%). To this increase contributed the rising fuel prices, housing rents and some medical services. In annual terms, the consumer price index stood at 1.10%. When excluded the most volatile goods, inflation stood at 02.10%, up from 2% desired by the Fed. Although the Central Bank has a preference for inflation associated with the household expenses, today’s data confirm that the upward trend of inflation does not appear to be based on temporary factors. At a time when the US economy has not yet convincing signs that exceeded the deceleration observed in the 1st quarter, inflation rise impacts negatively investors confidence.

From now on, investors will scrutinize with greater attention the publication of economic data and the behavior of monetary and bond markets, which are the most sensitive to monetary policy.

The first consequence of the prospect of an increase in interest rates was a generalized rise in US interest rates in the bond and money markets. With this increase becomes more attractive hold dollars because they are remunerated at a higher interest rate than the Euro and the Yen (two currencies with a perception of risk almost identical to the US dollar). But the appreciation of the dollar makes the purchase of commodities (whose price is expressed in US dollars) more expensive for European and Asian buyers. On the other hand, with the appreciation of the dollar (depreciation of the Euro) becomes more competitive European exports, which could mitigate the negative effects mentioned. However, the appreciation of the US dollar increases the debt (expressed in euro) of many emerging countries as well as their inflation (because imported goods are more expensive). Some of these countries (such as South Africa and Brazil are in a phase of economic contraction, which can not be tackled by the respective central banks to the extent that they can not reduce interest rates because of rising inflation. The rise in interest rates and US yields increases the attractiveness of bonds of this country when compared to the stocks of utilities and other more defensive securities with a high dividend yield. The increase in interest rates in the US decreases the present value of profits companies will generate in the future. This current value is calculated by the division of the value of estimated future profits for an interest rate. By increasing the denominator decreases the value of future profits and as such the fundamental value of companies. In this context, the banking sector is an exception. The rise in interest rates increases the differential between interest rates on loans and interest rates on deposits, which has a positive impact on the margin of the banks. This effect does not guarantee a valuation of US bank shares (or European banks present in the US) but may lead to an over-performance compared to other sectors.

Today begins one week quite intense in terms of interventions of members of the Fed. After the publication of the minutes of the last meeting of the Fed, investors will find out whether the position of the various members of the Fed remain. In fact, the meeting was held on 26 and 27 April, before they were published a series of economic data which pointed to a slowdown in the US economy. For today are scheduled interventions of Governors of the Federal Reserve of St. Louis, San Francisco and Philadelphia.

What an expressive rising effect on European Shares as Euro Falls!

The rise in European markets during yesterday’s session was due in part to the recent decline of the euro. Despite the depreciation of the European currency has started two weeks ago, only recently (when finally broke the 12.01 against the dollar) is that stock markets began to react to this movement. The depreciation of the Euro does not always translate into a recovery of European markets; often translates into a mere over-performance compared to their American counterparts. Despite the devaluation of the past few weeks (which was due to a higher probability of a rise in US interest rates), the Euro in 2016 has appreciated against the dollar contrary to most forecasts. To this has contributed, in relative terms, that the economy of the Eurozone have had a very resilient performance compared to the downturn suffered by the US and some emerging economies. Favoring this trend has mainly been domestic demand that has benefited from the reduction in fuel prices, the low interest rates and expansionary fiscal policies in some countries.

The stock market is extending the gains made in the previous sessions, supported by the statements of a member of the Fed, the positive indications of the real estate market, and the buying that have flocked to the technology sector.

The Chairman of the Fed has been, within the executive committee, the more conciliatory with the financial markets, and the one whom have shown more prudent in relation to a change in monetary policy.

Today, US markets will be closed, celebrating the Memorial Day. On this day are reminded Americans who have died in all military conflicts since the Civil War. This date marks the beginning of the period in which Americans begin to enjoy the summer holidays.

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%.

After trading above 50 USD / barrel on both sides of the Atlantic, crude has in recent hours a sharp devaluation. This downward movement is explained by the approach of the OPEC meeting tomorrow (which led some investors to profit taking), the statements of the Minister of the UAE oil (which reports that it is satisfied with the current market conditions, away so the scene of a freeze on production) and the disappointing data of the Chinese economy.

During the press conference, Mario Draghi should reiterate that monetary policy remains accommodative. It will be interesting to see if Mario Draghi will mention some risks approaching on the horizon, as the referendum in England (June 23) and the legislative elections in Spain (26 June).

On one hand, rising wages increases consumption and reflexively boosts GDP. On the other hand, the increase in wages generates inflation (increasing production costs and intensifying the demand for goods and services), helping the Fed to achieve the desired 2%. Thus, the two main employment report variables will be job creation and change in wages. Most likely, it is sufficient that only one of the two variables increase to reinforce the likelihood of an increase in US interest rates. Even if there a significant reduction in employment but accompanied by a rise in wages, the Fed may consider that the conditions for a rate hike are met. This position is explained by the fact that the lack of job creation is due not to a decline in economic activity but the lack of people available for hire without a prior increase in wages. In other words, such a scenario could mean that companies would be forced to pay higher wages to hire new employees, thus triggering the positive effect desired by the Central Bank. The employment report also deserves a note of warning. The reaction to its publication may be volatile to the extent that their numbers may be adulterated due to the strike by 36,000 employees of Verizon. Many of these workers (who are paid weekly) may not have received their salary and as such may be statistically treated as unemployed.

Although the unemployment rate is very sensitive to statistical adjustments, a decline as steep unemployment in weak job creation scenario is a rather contradictory combination. The only certainty that stemmed from this report is that wages continue to grow (0.20% monthly; 2.50% in annual terms), confirming the trend of recent months. The main reading from this report is that increases uncertainty about the future of monetary policy in the US. This indicator raises the question whether after this data (which should probably be revised upwards next month) is sufficiently striking for the Fed to postpone a possible rise in interest rates at the July meeting. Although these figures decrease the likelihood of an increase in interest rates, increase the uncertainty in the current environment and the uncertainty is the worst threat to the financial markets. Investors fear over an uncertain and unknown factor than a negative factor already know. In this context the intervention of Janet Yellen in Philadelphia (17h30) will be closely followed.