Trading Journal

At the current moment all seek to know what is the extent of the recovery of European stock markets. In fact, there is a risk that this rally is taken advantage of by many fund managers to decrease their exposure to equity markets. The recent rally takes various characteristics of a climb framed in a downward medium term movement: the main buyers are hedge funds and short-term investors which are closing selling positions, the volume is not high and the sessions are particularly volatile. All these signs advise greater caution.

In the pre-opening, European indexes traded with some gains. Initially, investor sentiment will be influenced by the the words from the Governor of the Bank of England, Mark Carney, who said that this institution is ready “to take any action to support the economy.” These words were not a surprise but served to ensure investors’ expectations regarding the Central Bank stance. However, Standard & Poor’s reduced the rating of the European Union from “AA +” to “AA” with a stable outlook, due to the departure of the United Kingdom from the European Union. In principle, EU stocks should not react significantly to the various data that have been published in Asia.

Asian indices extended the end of the rally last week, despite the uncertainty generated by the inconclusive outcome of the elections in Australia. In fact, from the results of the polls, no party can form a stable government, coming up just a phase of negotiations. Rating agencies have warned that the political deadlock is prolonged, the financial rating of Australia (which is the highest in the three largest agencies) may be revised downwards.

Wall Street investors will continue to monitor the developments in Europe but expectedly with the same detachment that demonstrated so far.

In England, three funds dedicated to the real estate market suspended the possibility of its subscribers to withdrawals. The surrounding European policy, marked by uncertainty in the United Kingdom, Spain, Austria and Italy had risks that apparently the financial markets were not considering in full. It was not noticeable if last week’s rise had been a technical reaction to the falls of the post-referendum days or mirrored one complacency of investors to the risks mentioned. The Brexit effects are not yet fully visible, but at this stage the referendum showed known issues, including the delicate situation of some Italian banks. With the earnings season in the US approach, the possibility of investors give greater emphasis to the exposure of American companies to the Eurozone, recalling that in the last 4 quarters, corporate profits have been declining.

In England, real estate funds continue to suspend the possibility of redemption. English real estate market, especially in the London area, has been one of the most dynamic worldwide. Several investors sought this market to diversify its portfolio of assets, other acquired properties in England as a solution to a situation marked by equal interest rates or below 0%. Other investors faced the English real estate market as a refuge: in 2011, the Greeks were the main buyers of homes in London. Now, with the strong depreciation of the pound these investments lost value when denominated in the national currency of these investors.

The Italian Government submitted a recapitalization plan for the banking sector (the most urgent the Monte dei Paschi di Siena) by state intervention, which is allowed by European standards but only under certain conditions. One of those conditions is that the bondholders participate in this plan through a partial restructuring of the debt they hold on banks. It is at this point that differs from the position of the Italian Government and the European Commission. At the end of 2015, the insolvency of four regional banks that affected nearly 20,000 private bondholders created a deep social objection that the Italian Government now wants to avoid. The second part of the Italian plan provides that a fund (consisting of banks, foundations and other institutions) buy the bad debt of some banks.

Begins today officially the earnings season in the US, with the publication of quarterly Alcoa’s accounts, but only after the closing of the session. The forecasts point to a result per share of 0.09 USD, below the 0.19 USD recorded in the 2nd quarter of 2015. Although there is no statistical correlation between the quarterly accounts of Alcoa and the general trend of Earnings Season, the results of this company always have a impact on investor psychology.

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Once again Asian markets closed higher, led by Japanese equities. After the electoral victory of the weekend, Prime Minister Abe stated that his executive is ready to take further measures to stimulate the economy, according to some members of his party, could amount to 100 000 M.USD. In China, inflation relative to June increased 1.90% compared to 2% in May. The Beijing government has an official target of 3%. This confirms the slowdown of the Chinese economy and raises expectations among investors that new stimulus measures may be adopted.

US markets extended the recent rise, with the S & P and Dow Jones reaching a new record high during the session. For the rise contributed some positive signs from Europe (including the end of the political stalemate in the English Conservative party) and the electoral victory of Shinzo Abe in Japan, whose promised measures of stimulus have indirect consequences on Wall Street. In addition also had influence the strong recovery of oil and the need for many fund managers follow the rise of the benchmark indices. Against this uncertain scenario, the fund managers had adopted a defensive posture, which will now have to leave if the S & P continue to appreciate in value.

Asian markets traded without major fluctuations. Once again, Japan was the exception to extend the recent rise, triggered by the victory of Shinzo Abe in the elections of last weekend. However in China, economic data continues to generate some apprehension. In June, exports fell 4.10% and imports% 8.40. Imports fell for the 20th consecutive month. The fall in exports indicates a lower economic activity in major Chinese trading partners, while another bending of imports indicates a slowdown in domestic demand, which so far has shown some resilience to the general slowdown in the economy.

Yesterday US markets closed higher again, extending the recent appreciation. In addition to the positive environment that has marked the last few sessions, the American indices were boosted by good results from JP Morgan and its effect on stocks of other banks. JP Morgan reached in the 2nd quarter an unexpected increase in profits, with the unadjusted EPS reaching 1.55 USD compared to 1.54 USD in the same period of 2015. Revenues amounted to 25200 M.USD. These figures exceeded the forecasts of analysts who foresaw an EPS of 1.43 USD and revenue 24300 M.USD. The increase in the credit transfer as well as increased activity of the credit cards unit allowed the bank to overcome a very adverse environment. JP Morgan’s shares rose 2%. Today, the earnings season continues with Wells Fargo and Citigroup. The results of Wells Fargo are particularly relevant to the assessment of the situation of the provision of credit to the extent that this institution is the largest lender in the country. The results of JP Morgan improved investor sentiment towards the banking sector, which had previously been penalized by the gradual decline analysts’ estimates and the reduction of perspectives regarding possible increases in US interest rates.

The situation of the Italian banking sector and not yet visible effects of Brexit may have been the reason for the redemption of European equity funds. The funds dedicated to emerging markets gathered 6100 M.USD subscriptions in the last two weeks and funds specializing in bonds with yields and high risk registered 4400 M.USD.

After the UK Referendum its time to switch from news driven volatility trading and to update our models for the near future

Asian markets closed mostly with modest losses. In Tokyo, shares in Nintendo fell almost 13%, a movement from the profit taking following the sharp recorded rise since the launch of Pokemon Go application. In fact, since July 6, Nintendo shares rose from 14900 JPY (Yen) to 32700 JPY reached yesterday.

Asian shares had a positive session, driven by the strong Wall Street performance. Again, the Japanese market stood out positive. In addition to the favorable effect of the US markets, the Nikkei benefited from a report in the Kyodo News newspaper that point in the government Abe will implement a stimulus plan for the economy amounting to 188 000 M.USD. Previously, circulated in the market a rumor that the stimulus would total the 95,000 M.USD.

In recent years, the central banks were the protagonists of the rise in global stock markets by adopting stimulus measures that allowed them to overcome adverse factors such as the loss of the maximum rating of US debt, the crisis of European sovereign debt, Japanese economic stagnation and more recently Brexit, among others. This created a dependence that financial markets have from central banks, a dependency which is demonstrated every time occurs a correction of the markets when the support of these institutions seem destined to decline.

In the oil sector, Schlumberger and Halliburton, two of the largest suppliers of oil sector services, argued that probably the minimum the price of oil may have already been reached. In 2013, the price of crude oil traded at levels above 112 USD / barrel before entering into a strong fall that led earlier this year to levels close to 26 USD / barrel. The oil sector will be the protagonist of this week’s earnings season and its quarterly accounts will be the main challenge for the American markets. Analysts estimate that on average profits from this sector have retreated 71%. More relevant than the results will be the prospects that the CEO of the oil companies will provide.