Trading Journal

Despite the latent threats, the oil fall, the fall of the euro, the ECB’s decision to apply the quantitative easing program in the Eurozone and the allocation of global investors are critical factors that have contributed to the good performance of European markets. European economies are the main beneficiaries of the oil price fall (reduces production costs and increases the disposable income of consumers) and euro devaluation (improves competitiveness in foreign markets for European companies). To help is also the good results (in relative terms) of European companies.

Early in the morning, the stock markets traded without major fluctuations. After Greece submitted a proposal to extend the loan received, the Eurogroup will meet to discuss the proposal. Initially the meet was to be done by video conference, but will now be held a meeting in Brussels, which may favor an understanding. The news that the various statements made clear yesterday, the Greek proposal merited the opening of some countries and the European Commission itself but also skepticism in Germany and other countries like Finland and Austria. Although the deadline given by the Euro-group formally end today, it can not be excluded, in case of not reaching an agreement, extended talks along the weekend. In this context, the publication of the preliminary reading of the PMI indexes (purchasing managers index) has less importance than usual. It was anticipated a slight improvement on previous months due to already be reflected in the European economy the effects of the devaluation of the Euro, the fuel price fall and monetary environment even more beneficial, however the PMI values ​​came out lower than expected.

The Wall Street behavior will depend on developments in Europe, knowing that when the stock market indexes hit new highs usually attract retail investors interest.

The Nasdaq was able to record the ninth consecutive session in positive territory. The technological index continues to benefit from investors’ preference for more cyclical companies and the optimal performance of Apple. The macroeconomic issues will take center stage over the coming days.

In addition to the macroeconomic and political focus, the earnings season continues to attract attention, but today we have an event that could bring some volatility because at 16h30, Mario Draghi will be present in the European Parliament, where he will present the ECB’s Annual Report .

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Asian markets closed higher, highlighting the sharp rise in the Nikkei, which continues to reach new highs of the last 8 years. Boosting Japanese stocks were essentially the depreciation of the yen and expectations that the Central Bank of China may announce new monetary stimulus.

Oil shares shall be under pressure after yesterday’s decline of 3.89%.

European markets react positively to the recent macroeconomic events in China, reflecting the measures announced by the Central Bank of China. On Saturday, this institution reduced the benchmark interest rate from 5.60% to 5.35%.

Today’s session was the only of the week that was not provided with publication of economic data. In China, the stock exchange lost more than 2% in a session marked by weakness of the construction companies and banking institutions. It was a faithful barometer of what was going to happen in the rest of the main stock indexes as after the Nasdaq Composite Index climbed above 5,000 for the first time in 15 years, the health-care and technology companies slid, dragging the Stock Market to a decline.

Lower than expected sales in cars in addition to a number of indicators have pointed to a loss of momentum in the US economy earlier this year. For now and despite yesterday’s reaction of the stock markets, investors have not given too much importance to these signs of slowing, on the contrary, have them interpreted as a factor which may delay the process of interest rate hikes.

European markets recovered from Tuesday Losses and are at new highs. The drop from industrial orders in Germany (-3.90% in January), which was worst than the estimation, reinforced the negative trend of the euro, which benefits the stocks of exporting companies. The ECB meeting is the main event of the day. Six years after the U.S. Federal Reserve began quantitative easing, the ECB’s Governing Council committed to its first asset purchases next week in a program amounting to 60 billion euros ($66 billion) a month.

European markets started the session negotiating with no major fluctuations. The publication of the GDP of the Eurozone on the 4th quarter remained in the values ​​of the previous calculation. Compared with the 3rd quarter of 2014, GDP grew 0.30%, reflecting an increase in domestic consumption and investment in machinery. In recent weeks, several indicators have shown signs of improvement in the economy of the eurozone, which justified the upward revision of the ECB’s projections for 2015 and 2016. At the micro level, the evidence confirms this trend. Regarding the earnings season, about 80% of the companies belonging to the STOXX Europe 600 index have reported their quarterly results, recording an average growth of 22% of their profits. This will have been the best earnings season since mid-2011, with 61% of companies beating estimates, compared to the usual 48%. Today, the Foreign Ministers of the European Union will meet at 10:00 am in Riga (Latvia). The main item on the agenda will be the situation in Ukraine. It is not excluded that it is discussed the possibility to impose new sanctions on Russia. During the afternoon, European markets will be influenced by the publication of the US employment report.

While Americans indexes corrected (the S & P fell 1.60%), European markets extended the recent rise. Although the overperformance of European stocks can be justified in the light of various factors (improving economic outlook, monetary policy of the ECB, the positive effects of the oil drop and the Euro, etc., a difference of behavior between the European and American markets is not sustainable. There is a historical correlation between these markets, and the differences of merely casual and short-lived trend. Thus, a convergence between the two markets is expected, although it is not yet apparent whether this convergence will be made by a rise in US markets or a correction of the European markets. Not disregarding the factors that have driven the European indexes (and which shall remain valid even before a correction), it is more likely at this stage to be the European indexes to correct.

Stock Market decline, wiping out recent gains, as the dollar strengthened to near a 12-year high versus the euro amid speculation the Federal Reserve is moving closer to raising interest rates.

The Market is recovering from yesterday’s losses. Although Wall Street has prolonged the correction after the European close, European equities, show some resilience based on losses contained in the Asian markets and the favorable climate that has involved the European markets. Today initiate negotiations between the Greek authorities and technical EU / IMF / ECB on the measures that will be implemented in the country. The European indexes will remain very attentive and sensitive to any rumors or news from Athens. Also today, the ECB will hold its annual conference, where the debt purchase program is undoubtedly a major topic as well as the economic outlook in the Euro Zone.
US shares closed yesterday with sharp losses. The main cause for the drop is the concern that the Fed may raise interest rates sooner than anticipated last week. The key event that changed the perspective of investors was the employment report, which described a very dynamic labor market. The prospects of a rise in interest rates in the US also influences the equity markets through the foreign exchange market. A pattern that starts creating some concern among investors is the rise of the dollar. About 20% of the revenues of the constituent companies of the S & P is generated outside the US. Thus, the appreciation of the dollar decrease the value of revenues and profits in foreign markets as reduces the competitiveness of the products of American multinationals. Thus, when the dollar reaches extreme values, the correlation between this currency and the US indexes becomes negative. Today, the Fed will publish the second round of stress tests that assess how banks manage risk and its ability to increase the shareholder remuneration programs, such as the distribution of dividends and the repurchase of own shares.

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One of the most popular strategies among hedge funds (and also some private investors) is the purchase of shares of geographic areas were are being implemented quantitative easing programs. Therefore, Japan and the Eurozone are in favored markets for these investors. Since the beginning of the year, American savers signed in 4000 M.USD European equity fund and 1000 M.USD in Japanese equity funds. These subscriptions were made at the expense redemption of US equity funds, which in 2015 suffered outflows of approximately 5200 M.USD. This strategy has borne fruit, as from the beginning of the year the Eurostoxx50 appreciated by 15.73% and the Nikkei 10.33%, compared to a gain of only 0.34% of the S & P. While this strategy has obtained interesting returns, there are always risks when a strategy is followed by a very large number of investors. Another strategy that has been equally popular is buying dollars and selling other currencies including the Euro. Many investors fund in Euros (at interest rates close to or equal to 0%), convert these loans in US dollars and then apply them to higher interest rates for the eurozone. In addition to the differential between the interest rate of the loan and the application in Dollars, these investors also benefit from the appreciation of the US currency (increases the value of your application) and the simultaneous devaluation of the Euro (which reduced the value of the loan) . In relation to European equities, this strategy despite fruitful has attracted too many investors, which poses some risks. So if many of these investors decide simultaneously to close this strategy, we will assist to a drop of the Dollar against the Euro. Whereas the devaluation of the Euro has been one of the drivers of European markets, their valuation, although short-term could lead to a correction in the European indexes.

It seems we are facing a new paradigm in the equity markets, history teaches that the difference separating the two sides of the Atlantic will have to be resolved. The big question is by how: the correction of the European markets or the recovery of US markets? The answer to this question can be given by Euro behavior. The European currency has suffered a sharp devaluation against the dollar (for the reasons already described several times), boosting the prices of the exporting companies. Buying European bonds has been a very popular strategy among global investors. This strategy has already obtained interesting returns and considering we were quite investors that followed, there is a risk of simultaneous realization of capital gains if any adverse event arise. A possible negative factor may be a momentary recovery of the Euro, whose fall has reached extreme levels. The common currency’s behavior monitoring is of crucial importance at this stage.