Market View; World Stock Indexes; Trading Journal

S&P 500 closed with sharp devaluations, for the fifth consecutive day. The strong rises that Americans indexes reached in the second half of December led to a certain complacency among investors before the threats that had been forming on the horizon. Yesterday, these threats have become evident. The continuous fall of oil price and the heavy losses suffered by European markets led to strong selling pressure on Wall Street. The fact that the American indexes have reached successive maximums during the second half of December also made them vulnerable to the occurrence of corrections.
The fall of oil and the rebirth of the fears in Europe are two factors that correlate with each other. The uncertainty caused by the Greek political situation leads to a devaluation of the Euro against other currencies, especially against the Dollar. The appreciation of the dollar has a negative effect on commodities and more particularly on oil. Affecting the price of this raw material was also the alleged increase in production of some countries like Russia and Iraq. Usually when the price of a good falls its supply decreases; however at this stage this inverse relationship does not hold. Several countries increase production to offset the negative effect on the price decline of revenue. For countries like Russia, Venezuela, Iraq, among others, oil revenues are the main source of public treasury entries.
Some reductions by analysts, also affected investors sentiment, reminding investors that the prices achieved by some stocks can not be fully justified by the fundamentals of their respective companies.

In Europe, equity markets traded with some gains. The publication of the Eurozone inflation, measured by the consumer price index, will be one of the last relevant data that the ECB will consider before the day of the meeting, 22 Jan. For the first time in more than five years, the euro area inflation fell 0,2%. The result was slightly lower than the estimated decrease of 0,1%. The deflation spectrum has been pointed out by Mario Draghi, on multiple occasions, as the main threat to the economy of the Eurozone. The continuing fall in oil prices is affecting the companies related to this sector. Initially, this business sector could reduce investments in order to counteract the harmful effects of the crude oil price fall but investors fear that later these companies are forced to reduce its dividend. Another sector that will attract the attention of investors is the retailer. Sainsbury, the third largest chain of supermarkets English, reported a fall of 1,70% in sales (excluding fuel) in the last quarter of 2014 compared to the same period of 2013. The company warned that the future holds many challenges globally. The European retail sector was one of the worst performers in 2014 penalized for anemia in domestic consumption in Europe by high competition and the low level of inflation.

Stock markets advanced negociating with sharp gains. The good performance of Asian and American markets as well as the rise of oil in the Asian session mitigated the negative feelings that have dominated among European investors.

Stock markets retract today after the opening of the US market. After the strong valuations achieved in the last two sessions (for example the DAX appreciated by 4.90% since the minimum of Tuesday) it is expected that some investors realize capital gains. On the horizon still hover various uncertainties, which justifies the prudent stance of investors. In addition to the political and economic situation in Greece, the weakness of the Russian economy is still a latent threat. In an interview with the Financial Times, the renowned investor George Soros considered that Russia is a much higher risk to Europe than Greece. In addition, the price of oil, despite the stability of recent days, still has a high volatility which increases uncertainty in the equity markets.
Additionally, there are multiple signs of weakness in several economies. Today, it was reported that German industrial production on November decreased 0.10% compared to forecasts of an increase 0.30%. This difference is due to the sharp drop in energy production. In China, the publication of inflation confirmed the slowdown experienced by that economy. Although these data reinforce the fears of investors about the state of the world economy also increase the expectation that central banks will continue with its accommodative monetary policies. The last few years have shown that the equity markets are much more sensitive to the decisions of central banks than the state of the world’s economies.
Data from the American economy have played a secondary role in the current environment of Wall Street, but today this pattern should have been broken with the publication of the employment report. Employment grew more than expected in December and the unemployment rate fell to 5.6 percent, ending the best year for the labor market since 1999 and strengthening the US evidence as a highlight in the global economy.
The addition of 252,000 jobs followed a 353,000 rise the prior month that was more than previously estimated, a Labor Department report showed today in Washington. The jobless rate dropped to the lowest level since June 2008. The report wasn’t all good news as earnings unexpectedly declined from a month earlier.

European stock markets traded without a clear trend and nervousness dominated investor sentiment. With the approach of the meeting of the ECB (22) begin to emerge news and rumors about what will be the decision of the ECB. A few weeks ago, investors began to anticipate the announcement of a sovereign debt purchase program. However, the Greek political crisis has made the situation more complex. The performance of the Greek elections three days after the meeting of the Central Bank hinders the ECB position. It will not be easy for the Central Bank to announce it will acquire debt of European countries (including Greece) when the Greek party that leads polls threatened not to repay the debt of their country. In this context, the ECB met last Thursday to study several alternatives to tackle the deflation spectrum.

This beginning of the year has been marked by strong volatility, which should increase with the approach of the ECB meeting and the parliamentary elections in Greece.

In addition to the Wall Street retreat, the European session was also conditioned by the projections of the World Bank. This institution reduced its growth forecast for the world economy in 2015 from 3.40% to 3%. The weakness of the European and Japanese economies, as well as some emerging countries (China, Russia and Brazil) are cited as the main reason of this cut. The European Union Court of Justice gave today a positive opinion on the ECB’s plan and Mario Draghi won a legal endorsement for the bond-buying plan he designed to save the euro.

The abandonment of the connection to the Euro by the Bank of Switzerland certainly was the event of the day. Volatility continue to be a hallmark on the European sessions. The oil sector can recover some of the recent losses but remain a major source of volatility. Sustainable rising oil will only be possible when materialize one of two conditions: a minor imbalance between supply and demand or a decline of the dollar against major currencies.

The European Indexes consolidate after yesterday’s strong recovery . The Central Bank of Switzerland (SNB) used to prevent the CHF to appreciate in order to protect the competitiveness of Swiss exports . To achieve this objective, the SNB sold CHF and bought Euros in the foreign exchange market. However, this strategy has become expensive and did not catch the influx of foreign capital to the country, which constituted a buying pressure on the CHF. If the ECB implement a quantitative easing program, the selling pressure on the euro would be increased, forcing the Swiss central bank for increased efforts to prevent the appreciation of their currency, with little chance of success. In deciding to abandon this objective there has been a strong appreciation of the CHF, which immediately penalized Swiss equities as investors anticipate the negative impact on the competitiveness and profitability of Swiss companies. After the initial negative reaction, the European markets achieved sharp gains, motivated by the prospect of an increase of EU exports to Switzerland. Switzerland is the second largest destination for European exports after the US and ahead of China. The present moment is particularly delicate and turbulent, since next week we will have the meeting of the ECB (Thursday) and the Greek elections (Sunday). Today will be published the final reading of inflation in the Euro Zone in December. Economists estimate that the price level has decreased 0,20%, reinforcing deflation spectrum and increasing the pressure on the ECB.

The European indexes started the week trading high with the positive expectations for the ECB meeting next Thursday (22 Jan). These expectations should overlap to some risks hanging over the European markets since increase the odds of the adoption of a sovereign bonds buying program by the ECB. Although the program’s scale is still unknown, there were two indications that the ECB will act. The first was the assent by the European Court of Justice for the purchase of debt by the ECB under the OMT program (Outright Monetary Transactions). This assent is extended to a debt purchase program from the perspective of quantitative easing, thus rejecting the objections of the German Constitutional Court. The second clue was the abandonment by the Swiss National Bank (SNB) of the fixed exchange rate of the Swiss franc (CHF) against the Euro. This decision was taken considering that the ECB will adopt a quantitative easing program, which would make the SNB’s currency strategy unsustainable, in that it would be forced to buy very large amounts of Euros. However, over the horizon hover some threats.

The European indexes closed slightly higher and were in consolidation throughout the day. At this stage, European investors are more focused on the ECB’s Thursday decision than in the cooling signs of the global economy. Today in Beijing, the IMF reduced its forecasts for global growth. For 2015 this institution estimates a growth of 3.50% and 3.70% in 2016. In October, the IMF projections pointed to increases of 3.80% and 4% respectively. As the World Bank, the IMF pointed to the slowdown in the Eurozone, China, Japan and some emerging countries (including oil producers) as the main reason for cutting their estimates. These should also reduce the positive effects that the oil drop will take in energy-dependent countries such as those in Western Europe. The IMF decision is reinforced by the reading of China’s GDP, which indicated that the economy grew at the slowest pace in 24 years. The prevailing belief in the market is that the ECB will announce its sovereign debt purchase program. This belief was reinforced yesterday by the French President indiscretion that clearly stated that the ECB would go that way. Now, for investors the unknown is the program amount and its mode of action. While these issues do not find answers, many investors increase their exposure to the market, fearing to lose the positive effects that the ECB’s decision could have on the stock market.

The European Indexes climbed. The expectation of tomorrow’s ECB meeting dominates the feeling of European investors. Today starts the World Forum in Davos, an event that brings together many politicians, economists and top investors, it is therefore an opportunity to gauge their perspective on the world economy. The slowdown in China’s economy is one of the issues, as is one of the causes for the cut in global growth estimates for this year. It is not excluded that some of these politicians to wave the ECB meeting tomorrow, which could have an impact on the course of stock market indexes.

The Stock market rose after a three-day rally in the SP500 Index, as banks and transportation companies posted better than expected earnings. The session was marked by the European Central Bank’s announcement (ECB) that will adopt an expanded stimulus plan, including government and corporate bonds of 60 billion euros per month. The purchase will continue until September 2016. The announcement was made after the ECB maintained the reference rates unchanged at record levels.

Stock markets traded up. Investors continue to try to assess the impact of the ECB’s decision announced yesterday. In which extent the equity markets had not incorporated this decision, what are the sectors that most benefit from the acquisition of bonds and their effects in different economies, etc. The Central Bank announced that it will acquire 60 000 M. € monthly of debt instruments (mainly government bonds). The ECB will purchase a total of 1,080,000 € M. of debt instruments, over 18 months, starting in March. This is slightly higher than what was known early yesterday by some rumors. The ECB’s decision reinforced the downward movement of the Euro. This trend has justified the over-performance of stocks from export companies. Another factor that attracted the attention of investors was the publication of the final reading of the PMI activity index (Purchasing Managers Index) for the euro zone which averaged above estimates. A slight improvement over December but not strong enough to dispel fears about the European economy.

The European equity markets started the session trading low but climbed throughout the day, reaching new highs. Investors are preparing for another intense week, with continued earnings season in the US and in Europe and the first meeting of the Fed this year. At the macroeconomic level, the publication of the sentiment index of German business, the IFO, showed a slight improvement achieved in January. In the second half of 2014, this index has been falling before the repeated signs of slowing down not only in Germany but also the Eurozone. Another factor which may gain some weight is the rebirth of the tensions in eastern Ukraine, to the extent that in recent days there have been several armed conflicts in this part of the country. The fall of crude oil can create some selling pressure in the sector of oil shares, as should benefit the airline stocks, chemical companies and automakers. The latter sector has been one of the most favored by the fall of the Euro against the dollar and other currencies. 2014 was the first year since 2007 that saw a rise in car sales in Europe, with major CEO optimistic this sector for the current year, not only by the dynamism of the domestic market and the competitive advantage that the Euro has enabled us foreign markets.

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The European stock markets started the session with slight gains. The beginning of today’s session was influenced by some corporate results. Briefly, Roche reported lower annual results to estimates and the proposed dividend (8 CHF) was also lower than the market anticipated. The Swedish retail chain H & M reported higher quarterly results than expected and was confident in relation to the January sales. The European technology sector should respond positively to Apple’s results. The American company is an important customer of several European companies, such as the English ARM. At the end of the session, it is not excluded a decline in trading volume, reflecting the expectations of investors in relation to the meeting of the FED.

The Fed kept the outline of the statement of December. The central bank reiterated that it will continue to adopt a “patient” posture with regard to the standardization process of monetary policy and thus, if all factors remain unchanged, interest rates should not be increased in future meetings. Regarding inflation, the statement said that the increase in the price level has fallen and that this trend will intensify in the short term but in a broader time horizon prices are expected to increase at a faster pace, due to the improvement of labor market and decreasing temporary effects of oil fall. The FED withdrew the words “for an extended period of time” when it ruled on the maintenance of low interest rates. Another change from the December statement relates to the assessment of the economy. The FED believes that the US economy is growing at a “solid” pace instead of “moderate” as mentioned in the previous statement. Contrary to what occurred at the December meeting, the statement was approved unanimously, although it is important to note that recently the Central Bank Committee had some changes, with new members more conducive to an accommodative monetary policy than their predecessors. This event has generated an upward movement of the indexes for a few minutes before investors focus on the price of crude. Oil traded again under pressure after the US Department of Energy has reported that US oil reserves increased 8.84 million barrels last week more than 4.3 million barrels anticipated by economists. With this change, US crude oil reserves reached the highest level since 1982, when it began to be recorded in a systematic way. The crude oil price fall caused a selling pressure on the oil sector, which quickly spread to other sectors. In this harmful effect of oil joins the strength of the dollar, which penalizes revenues of US companies held in foreign markets (which represent about 30% of the total). These factors have raised the concern of investors. The worrying signs of coming earnings season are clearly evident in the good results from Apple. About 120 companies in the S&P500 have reported their quarterly accounts, generating an increase of 8,000 M. USD in profits over the previous year. From the total increase of 8000 M.USD, 5000 M.USD were generated by Apple.

The US economy expanded at a slower pace than expected in the fourth quarter with the slowdown in corporate investment. A fall in government spending and a trade deficit growing took shine to greater gains in consumer spending over the past nine years. Gross domestic product grew at an annualized rate of 2.6%, after a 5% gain in the third quarter, which was the highest level since 2003. The estimate of economists pointed to 3%. Although the American economy is the most dynamic among the main economic regions of the world, some factors have weighed on US actions. One such factor is the strength of the dollar which reduces the competitiveness of US companies as well as the amount of revenue they generate in foreign markets. The companies in the SP500 have a very broad geographic exposure, making them sensitive to this factor. The second factor has to do with monetary policy. Although the FED proves “patient” (in the words of the central bank itself) in relation to rising interest rates, investors know that the trend is for monetary policy to be less accommodating in future. This trend contrasts with that observed in other economic areas such as Japan and Europe. Perhaps this is the most important factor to the extent that monetary policy the Fed was the main catalyst for the bull market started in 2009.

China’s PMI index on manufacturing activity fell in January to 49.8, below the 50.0, thus signaling an industry in a contraction phase.