While US equities finished the session in negative territory, this is actually quite deceiving as markets managed to gain significant ground from their lows. Equities sold off heading into an Obama speech on the Russia situation, but the speech didn’t have an impact as it merely reiterated what markets already knew.
We had already seen a degree of caution in yesterday’s Asian trade and therefore selling into any major announcements was always on the cards. It certainly seems the battle between geopolitical risk and US earnings is in play at the moment and we’ll continue to see a tug of war in the near term. Today investors focussed on some positive earnings from Netflix and optimism we’ll see further positive earnings momentum from the 31% of S&P companies reporting this week.
On the MH17 front it seems there has been some constructive progress with the black box being handed over to Malaysian authorities. It’s now just a matter of time before we get more insight on the plight of MH17 and no doubt plenty of theories will be flying around through the week.
Indonesia declares an election winner
For now though, pressure seems to have eased a touch and this is giving risk assets some room to move. Japan returned from a holiday to lead the region’s gains with a move higher in USD/JPY helping sentiment. The pair had been under pressure due to the yen’s safe-haven appeal. Surprisingly regional markets even managed to shrug off gains in energy prices, which always threaten to weigh on growth.
In the emerging markets space, there has been plenty of focus on Indonesia where Mr Jokowi was confirmed as Indonesia’s next president after securing 52.9% of votes. Predictably it was a “buy the rumour sell the fact” affair as equities retreated following the confirmation of the results. Equities in Indonesia had been rising along with bonds and the rupiah heading into the results.
The baseline scenario is for a smooth transition but there has been plenty of noise around a potential challenge of the results. While many analysts see limited scope for this happening, there is a chance markets will price in a risk discount on this possibility. As a result there could be some mild profit taking in the near term. Mr Jokowi is looking to pave way for foreigners to own domestic assets, which naturally is favourable for markets. Should the transition pass without incident, then any weakness is likely to be used as a buying opportunity.
Europe pointing higher
Looking ahead to European trade, we are calling the major bourses firmer as they recover from yesterday’s losses. There isn’t much on the European economic calendar with UK public sector borrowing perhaps being the most significant reading to look out for. Credit Suisse shares will draw some attention after the company posted a pretty hefty loss on the back of a settlement with the US government.
EUR/USD is holding on to the 1.3500 handle and traders will continue to focus on this level as key support. I’d be more inclined to sell the pair on rallies closer to 1.3600. A break below 1.3500 is likely to be on the cards at some point.
In US trade we have CPI data as the highlight with the market looking for a 0.2% month-on-month rise which implies an annual run rate of 2%. We also have existing home sales and the Richmond manufacturing index on the calendar.
Apple report in focus
On the earnings front, we have some big names including Apple, Microsoft and McDonalds. Apple will report after the closing bell with analysts’ consensus expecting to see Q3 EPS of $1.23 and revenue of $37.95 billion. Margins are expected at 37.9%, with the market anticipating to see a slight decline in Q4 margin guidance to 37.5%. The tech giant is up 18% year-to-date and it’s interesting to note that Apple’s shares have fallen in six of the last eight quarterly reports.