Market View; World Stock Indexes; Trading Journal

At the last meeting of the ECB, Mario Draghi appears to have fulfilled the twofold objective he had set himself: to prepare the market for a change in the asset purchase program without unduly alarmising investors. The ECB could decide on changes to the asset purchase program at the next meeting in October, avoiding requests for more information from journalists attending the press conference. To avoid a more pronounced market reaction, the ECB President reassured investors that "a very accommodative monetary policy is needed" to generate the desired inflation.

Asian markets closed higher, essentially for two reasons. The first is the generalized recovery of the Dollar against the region's currencies. The second is that North Korea has not carried out any war test during the weekend. In the last 3 months, the Chinese stock exchange has been the best Asian performer, accumulating gains of 6%. Other Asian markets have been conditioned by tensions on the Korean Peninsula and the fluctuations of the respective currencies against the Dollar (which influence the competitiveness of their exports). The Chinese economy has behaved rather better than many economists anticipated a few months ago. Economic activity has given repeated signs of strength, grounded in the dynamism of infrastructure, the real estate market and exports. Chinese markets have also benefited from continued capital flows that continue to flow into emerging markets, of which China is the most representative.

In the last three months, the indices of the Old Continent registered a remarkable underperformance compared with their American counterparts. After the highs reached at the beginning of June, European stocks suffered a correction between 5% and 10% and in the last two months have consolidated over a wide range, without showing a definite trend. On Monday, some indices broke this high, increasing the likelihood of a short-term rally. This probability would be strengthened if the Euro corrected. Despite continuing to trade around 1.20 against the Dollar, the Euro has lost some momentum against other currencies, which deserves some vigilance from investors. The threats to this potential positive scenario for European equities are the situation in Korea and some hypothetical correction on Wall Street.

The Automobile Fair is still taking place in Frankfurt, the biggest event of this industry in Europe. This type of event is always a good opportunity to gauge not only the opinion of stakeholders but also their feelings about the current situation. After a first half of the year in which it has been strongly influenced by sales in the European continent (after six years of recovery), the automotive sector has been one of the best performers in the Old Continent in recent weeks.

As the next week’s FED meeting approaches, investors’ expectations for the US Central Bank’s position on how it will reduce its balance of 4200 000 M.USD in assets as a result of 8 years of an ultra-accommodating monetary policy. This week’s economic data should help investors design a preview of next week’s meeting.

Despite the immediate immediacy of the launch of new products, the market reaction to the Apple event turned out to be negative. Apple shares fell 0.80% in the session and later 0.18% in the afterhours session.

The Friday rally is explained, mainly, by the closing of futures and options. In addition to increasing exponentially the volume of the session, the maturity of this type of derivative contract has, in most cases, a positive impact on the stock market. Similarly, and still statistically speaking, the week following the quadruple witching tends to be negative for stock markets, while increasing volatility and declining stocks.

Tomorrow prudence should mark the session, with investors waiting for FED (tomorrow) and Bank of Japan (Thursday) meetings.

Statistically speaking, the week following the quadruple witching tends to be negative for stock markets, while increasing volatility and declining stocks.

The FED has a balance sheet in the order of 4500 000 M.USD in assets of various kinds, but mostly bonds, as a result of the acquisitions conducted to resolve the 2009 financial crisis. After several years, with the economy in solid expansion and with the financial sector the FED intends to reduce this gigantic balance sheet without causing major effects on the economy and the financial system. This is an unprecedented task, so the Central Bank will be a pioneer and should set its course as this process unfolds.

The FED meeting caused a sharp rise in US yields, a move that affected its European counterparts early in the session.

Asian markets closed with contained losses in a session marked by a negative surrounding. The North Korean Foreign Minister warned that his country could test a hydrogen bomb in Pacific waters. This announcement generated a risk aversion but only assumed more significant proportions in the South Korean market, with the local currency reaching the low of the last month against the US Dollar. In a more economic sphere, Standard & Poor’s reduced Chinese rating of AA- to A +, citing the strong growth of credit assignment as the main risk to the economy, fueling speculation in some economic activities and making investments with little rational economic development.

Markets closed lower as investors reacted to yet another proclamation by North Korea and the uncertain political context in post-secessional Germany. Pyongyang authorities have defined the words of the American President as being “a declaration of war” at the United Nations. In China, the main indexes suffered losses of around 1% after local authorities announced that new measures will be introduced to control the strong real estate speculation that characterizes several areas of the country.

The Euro broke the support of the 1.18 against the Dollar. This level is very important in the medium-term technical situation of the common currency because it signals an increase in the likelihood of a correction. A downturn in the Euro favors several European sectors such as the automobile, the industrial, etc. However, this positive impact does not always translate into an increase in their shares. Sometimes the devaluation of the Euro results in a mere overperformance of the exporting sectors compared to the others.

In addition to the presentation of the draft tax reform, the main indexes were still driven by the recovery of the technology sector. Another catalyst for this rally is the approach of the end of the quarter, which is a very favorable period for stock markets.

A general improvement in sentiment was felt in this last session of the week, with major European stock indexes closing on positive territory. Banks and producers of raw materials were among the best performers, with few of the sectors ending up lower. Against the cycle were the shares of Volkswagen that were pressured by the announcement that the operating result was penalized by a charge of 2500 M. € related to the increase of provisions. On the macroeconomic front, the consumer price index reached 1.50% during September, compared to 1.60% expected and below the 2% target set by the ECB.

Several short-term technical indicators have hit the highs of the last two years, which increases the likelihood of a decline in the coming days. Financial markets do not move in straight lines, but their evolution resembles more of a series of waves. Therefore, if a short-term correction materializes in the next few days it is only a natural move after the strong gains of the last 4 weeks.

When an index reaches a new high, it usually attracts the buyer interest of several (mostly private) investors, stimulated by the coverage that this feat generates. This buyer interest manifests itself in two ways: through the direct purchase of shares and the subscription of funds. At the present stage, subscriptions are not meeting this standard. In fact, in the last two weeks it was observed the redemption of stock funds, in the amount of 10 500 M.USD.

Several short-term technical indicators have reached the highs of the last two years. Therefore, it can not be ruled out that some European indices, such as the DAX, may be vulnerable to a short-term correction. This hypothetical correction does not invalidate the upward trend of recent weeks.

US stock markets are making consecutive records for several sessions, and in the case of the S&P500 this was the eighth bullish session, something that had not happened since 2013. This was also the case with the Nasdaq Composite, while Dow it was the seventh straight day to climb.