Trading Journal

Asian shares closed lower, with the Shanghai Stock Exchange accumulating losses of 2.50%, at 7:00 am. During the weekend, the Financial Times reported that the Chinese government would abandon its strategy to stabilize the stock market by buying shares held by state-owned financial institutions. The government in Beijing will focus its efforts on the punishment of persons and organizations that supposedly destabilized the Shanghai and Shenzhen exchanges. Initially, the Chinese authorities have tried to counter the sharp falls in stock markets, buying, through state funds, about 200,000 M.USD in two months. These interventions did not have had the desired success, displeasing international investors, as they are not familiarized the State to adopt such measures.

Asian shares closed with losses, which were quite pronounced in Tokyo. Dictating this trend were the economic data on China. In August, the PMI index on manufacturing activity, elaborated by the Chinese Government, fell from 50.0 to 49.7. This is the lowest level since August 2012, thus signaling that the Chinese industry is in a contraction phase. Caixin/Markit index, which also measures the manufacturing activity, fell in the same month from 47.8 to 47.3, the lowest since March 2009, confirming the contraction signs from the official PMI index. The difference between the two indexes lies in the PMI index that appeal to a larger sample and focus mainly on state enterprises and larger. The Caixin/Markit index is focused on a smaller sample, which consists mainly of small and medium-sized enterprises. In the past, investors associated negative data of the Chinese economy to possible monetary stimulus measures at this stage, investors fear that the Beijing government further devalue the yuan, which could induce other emerging countries to adopt a similar measure.

Despite the heavy losses suffered by Wall Street and the uncertainty in Asia, European markets are expected to remain resilient, at least at an early stage. In any case, investors are still nervous and sentiment is still particularly fragile. Developments in China in recent months raise a number of issues that shake the convictions that investors had before the summer. In addition, some investors are wondering if falling stock markets worldwide will not be a sign that the world economy will enter a slowdown phase. While these doubts are not dissipated, the market will continue to seek a balance, a process that usually translates into higher volatility.

In the pre-opening, European equities were trading higher, favored by the strong appreciation of Wall Street and the relative stability of the Asian session. It is not excluded that the standard of yesterday’s session to be repeated today. Yesterday, there has been a remarkable over-performance of the indices of Central Europe comparing to their Iberian counterparts. The reason for this trend is related to the fact that Central Europe’s economies have greater exposure to China than countries like Spain, Italy and even Portugal. Apart from exports, several German companies and other Central European countries have factories in China, which increases their dependence to this country. Today will take place the meeting of the ECB, which will have less interest than usual. The main point of interest will be the update of the economic projections. Since June’s projections, the situation in Greece became less unstable but the slowdown of the Chinese economy has become more evident. The ECB estimates that the GDP of the Eurozone grow 1.50% in 2015, 1.90% in 2016 and 2% in 2017. Some economists expect the ECB to revise downwards their projections for inflation (0.30% in 2015 and 1.50% in 2016 ). At the press conference, held at 13:30 it will be interesting to see if Mario Draghi will weave any comments on the impact of instability in China in the Eurozone economy.

In the pre-opening, European shares traded lower, as a result of the fall of Asian stocks and the publication of the employment report in the US could instill some caution in European investors. The impetus given yesterday by the words of Mario Draghi to the European equity markets, which signaled the possibility to increase and extend the debt purchase program, it risks being temporary. Because of the August events in China and also in emerging markets, the fears of investors fell in the situation of the global economy (and especially the impact of China on the recovery of the Euro Zone) and more recently in future steps of the Fed. These are two themes in that the power of the ECB’s influence is quite limited.

In the pre-opening, European equities were negotiating with some valuations. The volume should be lower because of the US stock market holiday. Even considering this factor and given the relative stability of Asian markets, it is not excluded that the volatility is lower than that seen in recent weeks. Technically, as DAX remain at higher levels than 9930, the recovery which began on August 21 remains valid. Importantly, if the current recovery continues, it is expected to be very volatile in nature and short term. Investors face many uncertainties for now, fact that prevent the stock markets to find stability at the medium term. For these reasons investors should not exclude downward movements.

In the pre-opening, European equities were negotiating with some valuations, which could be an important clue in face of the disappointing indicators of the Chinese economy. These negative data did not cause a significant shock to Asian stocks, resilience which should spread to European markets. Metals were another asset that initiated a rise in the Asian session. Therefore, it is expected that, at least in the early hours, mining shares to extend the climb initiated yesterday, led by Glencore and Antofagasta, two securities listed in London. Against this background, it is not excluded that as noted yesterday, the Indexes of Central Europe present an over-performance against its Iberian peers.

Asian markets closed with strong valuations, especially the Nikkei, which reached the highest daily value since 2008. This record increase is primarily explained by three reasons, the first is due to the stability that the Chinese stock markets showed in the last two sessions, the second relates to the promise of Prime Minister Shinzo Abe to reduce the IRC at 3.30% next year and last, before the previous factors, many investors who held selling positions may have been induced to close them . Meanwhile in China, the Shanghai and Shenzhen exchanges were animated by rumors that recent indicators of the Chinese economy may force the Beijing government to adopt fiscal measures in order to curb the economic slowdown.

European equities opened lower, penalized by the reversal of Wall Street after the European close and the weakness of Asian markets in today’s session. The disappointing data in China and Japan should penalize mining, industrial and automotive shares, which yesterday had led the ascent in the Old Continent. The lukewarm reaction of investors to the new products Apple will constrain some European Technology its suppliers. Among these companies figure the English ARM Holdings who Apple is the main customer.

Yesterday the already fragile emerging markets suffered a small storm with the reduction of Brazil’s rating by Standard & Poor’s. Moody’s, which reduced the rating of Brazil a month ago, assigns a rating to Brazil to a junk level, while Fitch put the country’s rating just two levels above that category. If any more of these agencies reduces the rating of Brazil to junk, many foreign institutional investors (such as the American pension funds) may be forced to sell Brazilian debt because their statutes prohibit them from holding bonds with a speculative rating. Following the decision by Standard & Poor’s the real depreciated against the dollar, while the Bovespa suffered in the initial phase, some selling pressure. Financial markets and the currencies of other emerging markets also traded in decline and the selling pressure also affected the shares of several European companies (Unilever, Carrefour, Galp, Banco Santander, etc.) exposed to Brazil. More relevant is the impact that this may have in the Brazilian economy and reflexively in other emerging economies. At a time when China is slowing and many emerging economies are struggling, Brazil’s situation worsens this whole context. Crises in emerging markets in 80’s and 90’s teach that if we reach a breaking point in any one of them, the domino effect in other countries is particularly quick and sharp.

In the pre-opening, European shares traded with modest variations. The first hours of trading should be dominated by the alarming signs from China. Investors from the old continent shall observe its impact on the sectors most exposed to the Chinese economy (mining, automotive, industrial, etc.) and will monitor its reflection in the price of raw materials and the behavior of other emerging markets. After absorbing the reaction to economic data in China, markets will be marked by expectations of investors regarding the Fed’s meeting, on Wednesday and Thursday. The banking sector can be highlighted after Reuters announce that 12 of the largest European banks have agreed to indemnify institutional customers in 1885 M.USD to finalize a case involving charges of malpractice in credit default swap market.

Most investors should maintain a prudent and expectant posture with the approach of the Fed meeting. This behavior should induce volatility to levels closer to their historical average after the high peaks observed in August. The weakness of Asian markets may weigh on some sectors such as oil and mining. The weakness shown by the Chinese economy continued to dictate the negative trend in the price of oil and other raw materials during the Asian session. This less favorable environment should ease the positive impact of a 12% rise in car sales in Europe during the month of August. This was the second strongest variation of 2015 and validates the recovery of this sector started in 2014 after six years of recession. The brands most distinguished during the month of August were BMW, whose sales rose 17% and 20% of Renault.

US markets closed with gains of more than 1% but the volume was much lower than in recent weeks. The increase was led by sectors that have been most penalized in previous sessions such as oil and other more cyclical sectors. The day was also marked by economic data. Retail sales grew 0.20% in August, less than 0.30% estimated. However, this weakness is merely apparent, since the smaller increase than expected was mainly due to the price drop of fuel, an effect that is favorable to consumers that may materialize in the coming months. In addition, when excluding the more volatile items, retail sales rose 0.40%. While retail sales relative to July with these exclusions were revised upwards from 0.30% to 0.60%. These data, although positive, should not influence the decision of the Fed tomorrow, with regard to interest rates. Industrial production on July declined 0.40%, against a fall of just 0.20% expected. The publication of inflation, measured by the consumer price index, should not have too much weight on the Fed decision. Due to the decline in fuel prices and the appreciation of the dollar against the currencies of emerging economies in recent months is expected that the inflation fell in August compared with July. Leaving aside the prices of fuels and cars (usually volatile goods), inflation in annual terms is expected to be 1.90%. If these assets are considered in the calculation, inflation remains in 0.20%, below the 2% desired by the Fed.

Boosting US markets was the appreciation of oil (+ 5.70%) and possibly some expectation that the Fed will keep rates unchanged today. The commodities also rose in general, with an highlight to the appreciation of oil. This oil boost is explained by last week announce regarding the decrease of 2.1 million barrels. A large part of this decline (1.9 million barrels) was registered in Cushing (Oklahoma) which is a storage point for most of the oil generated in the US. The rise in oil boosted not only its sector as well as industrial, which has registered a high correlation with the evolution of crude oil. Another possible reason for the rise in the past two days has to do with a statistical curiosity. The New York Fed published an interesting statistic that indicates that since 1994 the American indices recorded valuations (in 80% of cases) in the two days preceding the meeting of the Fed. The meeting of the Fed is the main event of the day, and the decision will be reported at 19h00 and succeeded by a press conference where Janet Yellen will refer their motivations. Today’s session should be so divided in two phases. The first should be marked by the expectation of the Fed decision, with reduced volume as well as low volatility. The second part of the session shall be characterized by the reaction of investors to the outcome of the meeting. Most likely we shall be able to watch to a first reaction today after the decision, but the real impact will occur tomorrow, with the opening of the emerging markets.

In the pre-opening, European markets traded lower, albeit with very small volumes, a day after it was known the decision of the US Federal Reserve. In Asia, the market response was not uniform, having initially been observed a moderately positive response, but later stood the renewed fears about the health of the global economy, particularly the Chinese economy. Following this decision the Euro appreciated against the dollar which could penalize the stocks of the main European exporting companies, including car manufacturers and luxury goods. During the session today (and probably in the coming sessions) investors will reshape their expectations after yesterday’s decision by the Fed and then readjust their portfolios. At the same time, investors of the Old Continent will monitor the reaction of the commodities market (interest rates affect doubly these assets as they influence economic activity and the evolution of the dollar, which has an inverse relationship with commodities). In addition, investors will monitor the reaction of the first emerging markets in Asia (Asian and southeast Turkey) then in Africa (especially South Africa) until the opening of the Mexican and Brazilian markets.

In the pre-opening, European shares traded with modest losses. Questions regarding the monetary policy of the Fed and the global economic situation will shape investor sentiment in the near future. In the medium term, the outlook for equity markets looks a bit threatening to the extent that uncertainties should not dissipate shortly. It is not excluded the occurrence of recoveries in prices (as a reaction to recent losses) but the underlying trend deserves caution. An uncertainty that was feared by investors would be a tie in the Greek elections, which did not materialize, and the Greek bonds climbed in the first hour of trading today.

The evolution of the Chinese economy and its impact on emerging markets as well as the perception of the market against the US monetary policy will be the most important variables. In this context, DAX is a single case. Although this index is also influenced by the external environment, some specific issues have conditioned the German market. The first is related to the uncertainty about the proceedings and costs that RWE and E.On have to dismantle its nuclear facilities after the law passed by the German government, which strongly penalized their actions. On the other hand, yesterday announced that Volkswagen cheated on CO2 emission levels in the US, which should involve payment of damages and possibly lawsuits. Another risk is that other governments as they examine the practices were committed in their countries. Through the automobile sector’s behavior from yesterday, there is a risk of contagion to other manufacturers, which may have acted within the rules.

The macroeconomic data from China justified the fears of investors about the Chinese and global economy. Despite this data, the prices of the main raw materials remained stable, so it can attend a less selling pressure on the mining and petroleum sectors, much penalized in recent sessions. The situation of the Volkswagen came additionally to stress the panorama of the automotive sector. After the strong recovery of the past two years, which ended a row of six years of contraction, the outlook for the automotive industry became less optimistic with declining sales in emerging markets (especially China) and with increasing environmental pressures in Zone euro. The case of Volkswagen (which has already established a provision of € 6500 M. to deal with legal processes) may increase the pressure on other manufacturers (even if they have met the standards). The diesel is not as used in the US as in Europe and the sale of diesel vehicles was one of the bets of European manufacturers to enter the market of this country. European manufacturers are world leaders in the technology of this type of vehicles. With the infringement committed by Volkswagen this bet of the European brands may be impaired. In a survey prepared by CNBC on its website, 58% of respondents said they will continue to buy a car diesel compared to 31% who do not have this intention. However, several European countries have already announced that they will conduct rigorous testing of vehicles powered by this fuel, which represent additional costs for car manufacturers. Today at 14h00, the ECB President Mario Draghi will give some perspectives on the current economic climate to the committee of economic and financial affairs of the European Parliament. Although the outlook for markets is still threatening, given recent declines one can not exclude any short-term recovery.

US markets closed yesterday without major fluctuations. This behavior turns out to be disappointing in light of recent losses suffered by the stock market. In fact, contrary to what occurred in Europe, the US indices were unable to rebound, In recent years, the “buying the dips” strategy (buy the corrections of the market) had been a very popular (and profitable) strategy among investors, whether institutional or private. However, in recent weeks there have been few followers, signaling that in August, the strong and sharp falls suffered and the volatility observed, marked investor sentiment. Today, the President of the Fed, Janet Yellen, will be present at a conference organized by the University of Massachusetts at 22h00. Given the uncertainty generated by her press conference in last week’s meeting, this time she may try alleviate the situation.