Trading Journal

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.

After yesterday’s strong valuation of the DAX, we could see some profit taking by some investors of very short term, the so-called fast money.

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.

In a scenario of a slowdown in the release of corporate results, some stocks renewed new highs, even though stock indexes kept fluctuating.

With the economy expanding to 3% and with interest rates at low levels, many companies are tempted to expand through mergers. With funding rates at historically low levels, a merger or acquisition may be the fastest route for a company to increase its size and market share.

In US the budget committee warned that the proposed Republican tax reform would increase the public deficit by more than 300,000 M.USD than estimated by this proposal. Accordingly, the deficit threshold approved by the Senate (1 500 000 000 M.USD) would be exceeded. Today’s session is expected to be conditioned by the behavior of oil, the presentation of the results of some retailers such as Kohl’s and Macy’s (which signals the end of the earnings season), possible developments regarding the tax reform and news related to the visit President Trump to China.

Last Friday European markets resumed trading under selling pressure. The bottom line of this downward movement is more about more technical factors (the profit taking after strong gains in recent weeks) than on macro or microeconomic issues.

European stock markets ended lower, with most sectors reporting this behavior. The financial sector was among the worst performers, with investors worried about US tax reform. In Paris, EDF depreciated, after lowering the estimates of results and cash flow for 2018 due to the lower expected energy consumption, the lower availability of some of its nuclear reactors at the beginning of 2018 and a decrease in the capacity of compensation in Great Britain. Meanwhile, oil prices traded slightly higher, after OPEC raised its prospects for oil demand in 2018.

Mario Draghi will be present today at an important forum organized by the ECB, which will also include the Governor of the Bank of England, the Governor of the Bank of Japan and the Governor of the FED Charles Evans. Mario Draghi's intervention is scheduled for 10:00 a.m. Mario Draghi's words could be a catalyst for debt markets and could dictate the yield trend today.

Oil declined after the International Energy Agency cut its oil demand projections to 2017 and 2018. These projections slightly cool the positive sentiment that was being built around it but also serves as a justification for several investors to realize capital gains after the strong gains accumulated in recent weeks. In fact, from 9 October to 7 November, Brent appreciated 16%. The weakness of oil is also negatively affecting other industrial commodities, so the mining sector may also be under pressure.

The Fed announced they are ready to move in December with one rate hike and they did announce it beforehand so that it wouldn't be a surprise to the market environment.

At the sectoral level, the oil stocks could be one of the highlights of the session. Yesterday, DJStoxx Oil & Gas suffered sharp losses after the Norwegian sovereign fund informed it would withdraw its oil stocks from its benchmark. Norge Bank is the largest sovereign fund in the world, managing around 1 000 000 M.USD. The fund is fueled by oil revenues and aims to generate returns (through investment in financial assets) for future generations, when oil exploration is gradually losing ground.