Trading Journal

The epicenter of the weakness in the stock market lies in the bond market and more precisely in the rise in yields. Only now, and after months of upward trend, stock market investors are beginning to wake up to the potential detrimental effects that rising yields can cause. In a phase of high nervousness, any event can aggravate investors' sentiment.

Once the first negative reaction is over, and in a purely technical and short-term perspective, it can not be excluded that stock markets can start a recovery. World stocks may be favored by the fact that yields have reached levels that are technically called overbought.

Normally, after a steep decline like the one observed in the previous sessions, markets tend to fluctuate quite volatile not only because the fall forces investors to restructure their portfolios but force them to reshape their outlook on the stock market situation. At this stage investors’ sensitivity to events and news is extreme, so their reaction to these factors could be somewhat exacerbated, thus contributing to the remain of high volatility.

Deutsche Bank has published an interesting study on how S&P reacted after the 10 biggest VIX rises. Thus, on average, the S&P appreciated 3.90% in the week following the occurrence of these increases. However, S & P lost an average of 0.40% in the following month and 2.60% in the following three months. Yesterday’s rise in sovereign interest rates is explained by the lower buyer interest that the 10-year bond auction raised among investors and the news that the two parties in Congress have reached an agreement to fund the American state with 300,000 M. USD over the next two years. This measure is expected to aggravate the US public deficit, thereby putting pressure on its yields. A further sharp rise in state interest rates would have a negative impact on equity markets. The second variable relates to the volatility and financial engineering products indexed to it. The third relates to fund withdrawals.

This point is particularly relevant as there is a relevant difference between the decisions taken by investors and decisions resulting from an automatic algorithm. Investors tend to assess market conditions before submitting their orders, so in the absence of purchases a number of these investors are likely to wait for market normalization. On the other hand, the automatic programs generally act solely and exclusively according to the algorithms with which they have been programmed that will be able to integrate the market conditions or not. As a result, many of these programs will be able to sell even when purchase orders are at much lower levels than the last quote.

As it did last week, the evolution of American markets should dictate course and sentiment in Europe. In recent sessions, oil has suffered sharp losses due to strong sales by hedge funds.

On Friday US markets ended up in a session that was again marked by high volatility, thus completing the worst week for stock markets since January 2016. During the session, the S&P ranged from a loss of 1.80% to a appreciation of 2.10%. The magnitude of the S&P oscillation becomes sharper when compared to the fact that in 2017, the American index recorded about 150 consecutive sessions with oscillations of less than 1%. The day was totally dominated by market factors, which replicated the movements of the previous sessions. During the day, there were some selling associated with automatic programs and the foreclosure of positions held by investors who had resorted to financing to buy stocks. Also during the day, there was a buyer interest, a bit hesitant, but that prevailed in the last half hour of the session. The recovery at the end of the day is positive, but it is still not enough to assert, always with a dose of uncertainty, that marked the end of the recovery. It was not yet possible to identify who were the buyers who conducted the indexes to positive territory in the last part of the day. There is an aphorism on Wall Street that indicates that markets never touch the lows on Fridays. However, from a technical point of view, for a recovery to gain a more solid and lasting dimension, it would be important for the S&P to close, with a strong volume, above 2638 (which corresponds to Friday’s high).

With the positive performance of the banking sector, the US market recovered from the initial losses. This negative performance at the opening was spurred by the publication of data on inflation relative to the first month of the year. The consumer price index rose 0.50% in January (the highest increase in the last 5 months), up from the 0.30% expected by economists. In relation to the same month of the previous year, inflation remained at 2.10%, but exceeded the expected 1.90%. On the other hand, the so-called core inflation (which excludes the most volatile goods and is the most considered) also surpassed the estimates, when it stood at 1.80% in relation to the same period of 2017. As far as wages are concerned, quite relevant in recent times, there was an increase (adjusted to inflation) of only 0.80%. Retail sales for the same month were also known, which fell by 0.30%, the biggest drop in almost a year and compared to an estimated increase of 0.20%. If we exclude car sales, retail sales have remained unchanged.

The US market was trading higher, with indexes trying to reach a series of 5 consecutive days in positive territory. Attentions have been focused on macroeconomic indicators. Yesterday the data on inflation were announced and today the number of weekly applications for unemployment benefit has been published, which increased from 7,000 of the lows of the last 45 years to 230,000. In the business field, Cisco Systems was advancing more than 3% after having reported results higher than the estimates. For the first time in more than two years, the company has seen an annual increase in revenues.

In the United States, the recovery initiated in the last 5 sessions and that has allowed the recovery of the market after the recent correction, remained on this last day of the week. Today’s macroeconomic agenda has been filled with some relevant indicators. Regarding the real estate market, the houses under construction during the month of January registered a 9.70% increase, above the expected 3.50%, as well as construction permits which also showed a very favorable evolution (7.40%) and surpassed the expectations that pointed to a zero variation. On the other hand, the consumer confidence index, as measured by the University of Michigan, stood at 99.90, against the expected 95.50.

European markets closed lower, retreating from gains made last week. The volume of trading was lower than usual, given the closing of the North American Stock Exchange, reason why the movements ended up having a greater weight. Most of the sectors traded in the negative, with the losses being led by car manufacturers and pharmacists. Daimler fell 2.08%, after news that it may have used software to tamper with gas emissions. Reckitt Benckiser reported quarterly results and raised forecasts for 2018. Investors, however, attached great importance to moderate potential in terms of operating margin growth, so their shares fell more than 7% . In the banking sector, Deutsche Bank stood out positively (2.11%) after Bank of America Merrill Lynch raised its outlook for the stock and target price.

Most European stock markets ended up with almost all sectors showing gains. The London market was an exception, with the main FTSE 100 index showing a slight loss (-0.03%). The session was essentially based on the reaction of investors to some published results. Billiton recorded a devaluation of more than 4%, penalizing its sector. The mining company reported a semiannual profit amounted to 4050 M.USD and EBITDA to 11240 M.USD. Both numbers fell short of the 4340 M.USD and 11580 M.USD estimated by analysts. On the positive side, the proposed dividend is $ 0.55 per share, more than the $ 0.48 anticipated on average by analysts. In the banking sector, HSBC was another title that conditioned the performance of the British index (-3.35%), after presenting its results. The bank reported an adjusted annual profit of 20 990 M.USD that surpassed analysts’ forecasts for a net profit of 19,670 M.USD. Contrary to analysts’ anticipation, HSBC did not announce a stock buyback program, relegating that announcement “when appropriate.” In 2016, the bank bought a total of 5500 M.USD in its own shares. In Paris, Edenred rose more than 6%, after having reported strong results, with EBITDA and profit for 2017 surpassing the estimates.

Considered the largest retailer in the world, Walmart reported a adjusted EPS of 1.33 USD, which fell short of the estimated 1.37 USD. Revenues amounted to 136 300 M.USD, which exceeded forecasts of 134 900. But what displeased investors was the evolution of WalMart’s efforts to compete with Amazon in the e-commerce market. WalMart’s online business growth rate of 23% is small compared to the 40% recorded by Amazon. WalMart shares fell by 10.20%, the biggest daily drop since January 1988.

One day after the minutes of the last FED meeting were published, the US market was trading higher, with attention focused on the economic indicators reported and the interventions of some Fed members. The number of weekly applications for unemployment benefits decreased by 7,000 to 222,000, thus reaching the 2nd lowest level since the end of the 2007-2009 recession. The forecast was for 230,000. On the other hand, the advanced indicators of the economy registered an increase of 1% during the month of January, compared to the estimates of 0.70%.

Last Friday the US market traded bullishly, though on a weekly basis it was headed for losses. Hewlett-Packard shares rose about 10 percent after having reported quarterly results and future prospects that pleased investors. In terms of the debt market, 10-year TO yields, which peaked at the beginning of the week in the last 4 years, were now down to around 2,875%.

In the macroeconomic context, the day was marked by the presence of ECB President Mario Draghi in the European Parliament. In his first dialogue this year with MEPs, and about a week away from the next monetary policy meeting, the ECB President said that the ECB should remain persistent and patient in attributing stimulus to the economy, even in the face of current momentum which makes the Central Bank more confident in terms of prospects for inflation levels. In fact, Draghi argued that inflation remains dependent on monetary stimuli. In addition, Mario Draghi mentioned that ECB measures have placed the Eurozone economy on a “solid growth path, driven by domestic endogenous dynamics and therefore more resilient to a potential slowdown in global demand.” However, he added that “inflation has to show more convincing signs of a sustained path of adjustment.”

The indexes are still in consolidation. A breakout from this consolidation zone will set in motion and a trend for the weeks, until then we may expect to sell the highs and buy the lows.

The question that today's session raises is whether European indices will fully reflect the Wall Street losses or considering its recent underperformance this indentation will be limited. The year 2018 teaches that complacency can be a dangerous feeling.

The testimony of the new President of the FED forced investors to reshape their perspectives on the monetary policy of the FED. Jerome Powell, defended not only the dynamism of the American economy but also his conviction that inflation will reach (in the long term) 2%. Generally, the periods during which investors reformulate their outlook are volatile.