Deep cleansing breath into the weekend for equity markets


Today’s rally off of solid earnings and encouraging economic data is welcome. Given the backdrop of a pause in the trade lower that was established yesterday, after a test lower, it appears as though the panic that had gripped markets earlier in the week has subsided for the time being.  

As anticipated, markets are being provided with an earnings narrative that is encouraging to equity investors. Of the  S&P 500 companies that have reported thus far most have delivered on both revenue and earnings growth for Q3. Earnings growth in energy, materials and consumer discretionary have complimented the revenue growth we have seen in the health care and utility sectors.  All in, 80 of the S&P 500 companies have reported thus far. Of those, 64 percent have beaten on bottom line and 63 percent have beaten on Wall Street revenue estimates. Broadly speaking, S&P 500 earnings growth for Q3 stands at 9.1%. Revenues are expected to rise by roughly half that much. All 10 sectors are expected to post healthy year over year growth. So far, so good.

To a large degree the surprise for some this earnings season has come from financials. Both Goldman Sachs and Morgan Stanley reported better than expected numbers – by a wide margin.

The economic data we received this morning also acted to support the market. It is not just that it was positive. It is that it was positive and that it came from housing and consumer sentiment readings. Housing starts unexpectedly climbed 6.3 percent in August to an annualized rate of 1.02 million. In addition, the Thomson Reuters/University of Michigan preliminary sentiment index for October rose to 86.4 – the strongest reading in seven years.

Between solid Q3 earnings, positive economic data and the possibility of a residual QE still on the table, markets have regained some of the ground lost in this three week test lower. We will still close out the week with significant technical damage to the markets and significant distance from where we stood on September 18th. Again watch the earnings and data. Next week is the busiest week for earnings so far this season with 127 S&P 500 companies reporting.

ALL eyes and ears on Chair Yellen this morning - again


Data used to gauge the strength of the US economy continues to reflect expansion, employment growth and increased global competitiveness  despite being surrounded be a sea of turmoil, economic underperformance, a strengthening U.S. dollar and geopolitical fear. The latest example of this data is Thursday’s weekly jobless claims.

According to the U.S. Labor Department, applications for unemployment benefits fell last week to their lowest level in nearly 14 years, coming in at 264,000. The 23,000 drop from the previous report was significantly better than consensus forecast and an improvement in our already healthy employment and jobless trends.

Another positive for markets to consider was the fact that Industrial Production in September was significantly more robust than expected. September saw a 1% MOM increase from August. Consensus was calling for a 0.4% increase.

The jobless data and industrial production figures coupled with an official unemployment rate standing at 5.9% for September continues to support our expanding economic narrative in spite of our current season of heightened equity market volatility. Our underlying economic narrative remains constructive.

In fact, both the latest jobless report and the falling unemployment rate should argue well for an uptick in consumer spending – both in the case of discretionary and durables for Q4. The added benefit of significantly lower energy prices across the entire energy complex lends added support to the position held by many that the American consumer should hold up through this period of equity market dislocation.

Another theme that has come to bolster equity markets is focused on monetary policy. The mention by James Bullard, President of the St. Louis Federal Reserve, that there may be cause for the Fed to keep QE in place for the time being as a way of heading off concerns of the U.S. economy missing Fed inflation targets. As we all know, QE has been very constructive for equity pricing. Even if QE is kept at current levels, as minimal as they are relative to where we are coming from, it would keep inflation targeting more germane to policy – especially in a world where there are real concerns over demand in the EU and globally. Chair Yellen will be speaking this morning. All eyes and ears will be on her.

Clearly markets remain vulnerable. Very vulnerable.

Talks Renminbi becomg a reserve currency for the ECB

Reports are that the ECB is considering adding the Chinese Renminbi to its official foreign currency reserves. This does not come as a surprise. Many would argue the time is ripe for the move. China is after all the world’s second largest economy and one of the fastest growing. The Chinese economy and currency also represent the hopes and dreams of well over a billion of the world’s inhabitants.

Increasingly, Chinese Central Bank authorities have expressed  both informal and formal policy objectives aimed at increasing the stature of the RMB as well as its importance in international trade and settlement. This would certainly be a step in that direction.

If implemented by the  ECB, it would likely not occur for 12 – 18 months and only gradually over time. The impact on FOREX would be gradual and thematic. Certainly there would be a positive market reaction for the RMB – meaning its value would likely increase in the open market relative to its historic valuations and relative to other currencies in world markets. Though this may be considered a negative for a largely export driven economic model  it is definitely a positive for the broader RMB narrative and for Chinese economic stature  in global financial markets. Having the RMB as a reserve currency for the ECB  gives the RMB added value. It also adds a degree strategic diversity to ECB’s holding.   

The currency most used as a reserve around the world is the US dollar. This move by the ECB would have little impact on the dollar in the near term. Over time, this move may have a dampening impact on the dollar. Given that many economists believe the strength of the US dollar over the past few years has increasingly become a headwind for the global and US recovery, this may not be such a negative.

After all, Britain is already in the process of issuing a government bond denominated in the Renminbi  according to Bloomberg news. This move by the ECB, if it materializes, would be another step in a greater global acceptance of the RMB and would add a degree of stability to global FOREX markets.

FOMC rescues the market again but is this time different?

The answer is yes and no.

It is different this time around in that equity markets have been under significant technical stress for some time now and particularly since September 19. In fact, all three major indices were within striking distance of crossing below their 200 DMA - on the same trading day this week.

Heightened volume and volatility coupled with massive divergence between small cap names and the broader market has fueled a justified concern for the over health of our equity rally and its sustainability - unlike in other periods of intervention by the Fed. In fact, small cap universe has been a leader higher for years - that is until this year. The Russell recently crossed into correction territory for the first time in years.

Another area where this time is “different” is timing of monetary policy in relation to QE. It ends this month for the first time in years. Additionally, how long ago was it that we were debating the time line for rising interest rates?  That would be pre-crisis time frame. That is different.

These are all significant factors, among many, worthy of consideration in answering that question.

What is not different is the predictability of equity markets to respond enthusiastically to accommodative monetary policy as we have seen time and time again. It is also highly predictive and not different that markets respond positively to earnings surprises as with AA after the close. Given the broadly positive domestic economic narrative we have at this moment in time coupled with current monetary policy and the prospect of a solid Q3 earnings season, it would not be at all “different” for markets to weather recent challenges closer to more commonly accepted norms of valuation and on more solid footing.