CMC Markets | Oct 28, 2014 15:30
The sudden change in sentiment surrounding the ECB stress tests and European economic yesterday which saw a sharp drop in equity prices particularly in Italy has not followed through today with investors shifting focus across the pond to the Fed and tomorrow’s scheduled end of quantitative easing.
European markets took a big dip heading into this corporate earnings season but are staging a recovery given that earnings are holding up pretty well in the face of a generally stagnating European economy.
Whether European equities can surpass the highs made in September will largely rest on expectations over corporate earnings-power in the face of a European economy that seems likely to get worse before it gets better.
Banks were a drag on the FTSE 100 with Lloyds Banking Group Plc (LONDON:LLOY) and Standard Chartered (LONDON:STAN) both lower with job cuts and disappointing earnings undoing any goodwill felt from the stress tests. BP (LONDON:BP) proved it is still well capable of earnings in the face of difficulties over its Russian operations and the drop in crude oil prices.
US durable goods and housing data was weak but a positive trend in US corporate earnings, strong consumer confidence and the expectation of a dovish Federal Reserve in tomorrow’s meeting is keeping US equity markets well bid.
While there have been spots of weakness in corporate earnings; more than half of the S&P 500 companies have now reported and most companies are beating estimates and earnings are improving over last year.
As long as the Fed holds up its end of the bargain tomorrow and implicitly pledges to keep rates low then US markets should have what they need to press towards all-time highs.
Twitter Inc (NYSE:TWTR) is another “new tech” failure from this reporting season alongside Amazon.com Inc (NASDAQ:AMZN) after missing user growth estimates and will have investors feeling nervous going into Facebook Inc (NASDAQ:FB) earnings tonight. Twitter shares fell over 13% in early trading and like Amazon is another example of how quickly investors will shed overvalued stocks if the company misses estimates.
The US Dollar was mostly weaker today with a notable exception being the Swedish Krona.
The Riksbank cut interest rates to zero and pushed out the outlook for the next rate hike to mid-2016. Traders are selling the Swedish Krona to seek a higher yield elsewhere as USD/SEK broke to new four year highs.
GBP/USD held its ground above 1.60 last Thursday and today broke and retested 1.61. A break above last Tuesday’s high at 1.6185 could be the trigger for a larger move higher. Besides consumer confidence data on Friday there is minimal market drivers from the UK so it will if anything be a weak dollar that drives this pair higher.
Gold prices rallied in early trading but pulled back as prices kept within the $8 range that has dominated price action since last Thursday. The gold breakout could happen after the Fed meeting tomorrow but it might be Thursday’s GDP report that’s the catalyst for the next major trend.
The supply/demand imbalance has been redressed slightly by the cut in crude oil supplies by Saudi Arabia while the question of the profitability of US shale below $75-80 per barrel is putting a floor in oil declines for now with WTI peeping above $82.
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Written By: CMC Markets
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