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%.
The recovery of the Euro Zone economy continues to gain momentum. The Euro Zone grew 2.5% in the third quarter of this year compared to the same period in 2016, the strongest pace since the start of 2011. This result allows the euro countries to take off from the United Kingdom, as well as from the United States.
Dow Jones Industrial Average is holding above the 10-week moving average that should provide a good dynamic support for next week. Expecting a downward move to a Fibonacci retracement at 22,650 on a break below the previous week low at 23,201 however a break above the 2017 high at 23,435 may set in motion another bullish run to a Fibonacci extension at 24,111.
The positive trend on Wall Street continued at the beginning of the week as the end of the earnings season approached. Broadcom has officially launched the takeover bid for Qualcomm, which is the largest technology operation ever, valued at 103,000 M.USD. Advanced Micro Devices was up 5.90% on news that it plans to partner with Intel to form a personal computer chip unit. Meanwhile, investors were also paying attention to President Donald Trump's statements during his visit yo Asia, concerning North Korea's nuclear missile program and foreign trade.
HIGH RISK WARNING: Foreign exchange trading carries a high level of risk that may not be suitable for all investors.
Leverage creates additional risk and loss exposure. Before you decide to trade foreign exchange, carefully consider your investment objectives, experience level, and risk tolerance.
You could lose some or all of your initial investment. Do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions.
Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice.
Past performance is not indicative of future results.