Market View; World Stock Indexes; Trading Journal

The employment report was clearly disappointing. Not only job creation has undergone a sharp slowdown as well as wages have remained unchanged does not constitute an inflationary pressure. So in terms of monetary policy, this data further complicated the mission of the Fed and does not fit clearly the conditions for a rise in interest rates in December, increasing the uncertainty in relation to the timing of the first increase in rates directors in the United States. After an initial fall in response to labor market data, the markets staged a very strong recovery. The rally was led by sectors that had previously been more penalized: mining, oil and biotechnology. It may be pointed out some reasons for this behavior. The first is that the weakness highlighted by the employment market has caused a devaluation of the dollar and as a result there has been an appreciation of commodities, which boosted mining and oil sectors and the industrial reflection. As usual, the biotechnology sector showed a fairly high volatility but ended the session with 3.40% gains. The strong recovery of the US indices is a positive sign from a technical point of view, it is important to check if it will continue in the coming days.

Asian markets closed with some gains, which could perhaps have been more significant considering the rally held by the American indices. Today was signed the Trans-Pacific Partnership, an agreement between the US, Japan and over 10 economies of the Asia-Pacific region, which aims to promote free trade between these countries. This agreement is very important not only for the duration of their negotiations (5 years) as it involves countries that account for about 40% of world GDP.

The trade balance registered a deficit in August well above the estimated (48300 M.USD vs 42500 M.USD), while imports increased 2.60% and exports declined 2%. This fact limits the GDP growth in the 3rd quarter. In addition, the fall in exports, especially to emerging economies, may signal that American companies have suffered a fall in revenue in some areas of the globe. This is particularly relevant in the given moment as is approaching the earnings season.

In recent sessions there has been an appreciation and overperformance on assets with higher risk. This pattern does not mean that the risks that hit the market during the months of August and September have disappeared. It was the perception of investors in relation to these issues that has changed. Perhaps now investors believe that the Chinese GDP growth will slow down (to about 6%) but not collapse. On the other hand, in relation to US interest rates, investors begin to discount that its growth will only occur in 2016, so it is no longer so much uncertainty. Therefore, in the short term, one should not exclude a retreat of the major global indices but this correction will only be a natural movement after the strong gains of the last few days and should not represent a new change in investor sentiment.

The medium-term outlook for the equity markets have become more encouraging in the short term but there is a possibility of a correction after the strong gains achieved in recent days.

The beginning of the European session shall be dominated by factors specific to certain firms. Glencore announced that it will divest two mines, one in Chile and another in Australia, a decision which falls within the target of a 10 000 M. USD debt reduction. In the sector of foodstuffs, the Belgian-Brazilian takeover of Anheuser-Busch InBev on English SAB Miller remains the main theme. Reuters reports that the brewer AB Inbev can raise its offer for SABMiller. RWE and E.On have been the worst performers in the DAX this year (-52% and -36%) due to the uncertainty regarding the closing costs of their nuclear plants.

Many investors begin to anticipate that the ECB will announce a new phase of the debt purchase program. Based on a study of Standard & Poor's, some investors estimate that the quantitative easing program will reach 2400 000 M € and extends until the end of 2018.

Any rally towards the end of the year would come from China’s government doing more to stimulate the economy

The earnings season of the US banking sector continues today with the presentation of quarterly accounts at Bank of America and Wells Fargo. In the last quarter, Bank of America managed to surpass analysts’ forecasts due to lower legal expenses to the extent that the institution was ending their lawsuits. Now, it is important that the Bank of America manages results through an increase in its activity. With regard to Wells Fargo, its core business is the provision of housing loans, making it less dependent on the evolution of capital markets.

The automotive sector should capture the attention of investors, after some data on this industry have shown that the strong demand observed in Germany contributed to the sales increase in September, so it was registered the 25th consecutive month of growth in the European Union.

US markets extended their recent rally, managing to finish on high for the 3rd consecutive week. Despite the oil drop and the results that have been presented have not been very exciting in terms of revenues, most of the S & P sectors closed higher. One reason for the Friday climb was the need for many fund managers follow the rise of the benchmarks. Another reason was the fact that the S & P have overcome a major area of resistance of 2020, which triggered purchases of many quantitative models of trading. Despite these reasons, the earnings season continues to be the main topic on Wall Street.

During this week, some members of the Central Bank will intervene in financial events and will be interesting to see if they will repeat the rhetoric of Fed (an increase of interest rates in December) or will wave to the weakness of some economic data.

The Earnings Season remains the central theme. This Season has been marked by the high percentage of companies providing higher than estimated profits (about 74%) in opposition to a worrying proportion (60%) of companies reporting lower revenue than estimated. While profits depend on various factors (sales, costs, supplies, accounting rules, etc.), revenues depend primarily on demand for goods and services that businesses provide. Such demand depends on the degree of activity of the economies in which they operate. As such, the weakness of the American multinational sales are an alarming sign about the state of the global economy. Still, investors have shown a complacent attitude towards this standard.

a decrease in volume shall occur due to the expectation surrounding the ECB meeting today, which is taking place in Valetta (Malta) and is expected to be the main event of the day. Investors will try to find in the words of Mario Draghi the confirmation that the ECB will be available to adopt new measures of monetary stimulus.

Mario Draghi is a skilled manager of expectations and an excellent communicator with the financial markets, even to have a greater effect than the disclosure of corporate results and economic data.

The almost vertical rise in European equity markets after the ECB’s intention to extend the quantitative easing program and the decision by China’s central bank to cut interest rates put the European indices at extreme levels of overbought. The performance of these two central banks is not a surprise being expected by investors and by economists, so it is not to exclude a short-term correction but that does not invalidate the positive medium-term trend.

According to a statistical study conducted by Asbury Research, the last week of October is usually, since 1957, the worst stock market week of the 4th quarter and one of the worst of the year.

The meeting of the Fed will be the main event of the day and perhaps of the week. Economists do not anticipate any increase in the reference rate. Attention will be focused on meeting announcement and publication of the minutes a few weeks later. In relation to the Fed executive committee, opinions are considerably divided. Regional Governors, 8 out of 12 are in favor of an increase in interest rates in December. From the other members, Janet Yellen also advocates an increase in December as well as its Vice-President, although it has shown some reservations. Two governors advocate the maintenance of interest rates until 2016. Thus, Fed’s emerges a picture something divided by Janet Yellen, whom to keep the tradition of decisions based on consensus, will have to develop in the coming weeks a conciliator role within the Executive Committee with a basis to raise interest rates later in the year.

In short, yesterday's Fed statement challenges the prevailing perception in the financial markets (and especially monetary) that there will be no increase in interest rates before the year end, which had been one of the catalysts rally in stock market indices in October.

The statement from the Fed lead investors to focus again on major economic issues. The US economy suffered a sharp slowdown in Q3 to grow only 1.50%, significantly less than the 3.90% observed in the previous quarter. Estimates of economists pointed to an increase of 1.60%. However, this variation is less serious than it appears. The economic slowdown was mainly due to the sharp fall in inventories (almost 50%). This effect is equivalent to about 1.44% of the economy. This is likely to be temporary in that, depleted inventories will need to be replenish in the coming months, thus making a positive contribution to GDP.