Sentiment seems to have taken a bit of a step backwards of late and traders will continue to watch sentiment measurements like the VIX (volatility index) and the credit-default swap (CDS) market – both at a sovereign and corporate level. It’s also worth watching Dr copper and the 10-year US treasury as well, with the former right on its June 2013 uptrend support and also in-line with a measured move drawn from the December high.
The S&P 500 is testing trend support drawn from the November 2012 low and a break of this trend could see the 200-day moving average come into play at 1706 over the coming weeks. It’s interesting that 50% of companies have now reported and a massive 79% of these have beaten on the EPS line, which is four percentage points above the levels we saw in Q3. We’ve also seen 65% beating on the revenue line, with just over 2% sales growth. Clearly these are good numbers and if the US index was trading on a reasonable discount to the long-run average I’m sure these earnings would have been a positive catalyst.
Given the market trades on 7% premium to the five-year average we’ve needed to see the big heavyweight names providing really solid guidance and putting real backbone into the rally. However that isn’t happening and mix in a number of macro concerns and you can see rational behind the recent weakness.
A bit of a bounce in US futures early in the day
US futures moved higher out of the gate this morning, but have since retreated after the Nikkei started finding sellers. Price action in the Nikkei looks fairly sick right now and has broken through good horizontal support drawn from the September and October pivots. There are around 15 Nikkei stocks reporting today, and throughout the week we get around 600 TOPIX companies reporting so it promises to be a volatile week here and the index could have big ramifications on sentiment in other markets in Asia, like the ASX 200.
The ASX 200 made a move higher in early trade, just when we started to see US futures move higher on limited news, although sellers immediately came back into the market just as the index was going positive as banks gave up gains. Earnings start trickling in this week in Australia, and while the sell-side analysts have been making public as to what stocks have upside and downside risks.
The major things I will be looking at is price action going into the earnings release, the level of short interest in the name and whether the stock has a good pedigree of beating consensus expectations. The earnings season will also be interesting for forex and commodity traders as well, especially given the murkiness surrounding Chinese growth and names like BHP, RIO and FMG, so any comments around China could be very interesting.
ECB looking at more aggressive action?
European markets are expected to open lower and while traders will be keen to focus on Fridays US payrolls report - especially because Societe Generale are expecting 270,000 jobs to be created - and Europe is looking to reclaim some attention. The two key metrics which the ECB look at are M3 money supply and inflation and both continue to fall and neither are heading in the direction the central bank have as forecasted.
The prospect of the ECB taking more radical action is increasing, with a number of economists calling for the ECB to cut not just the refinancing rate, but also cut the deposit rate they charge to banks this week which would take the deposit rate into negative territory. There has also been talk that the German Bundesbank may look at not fully sterilising the bonds in bought in 2012 in its Securities Market Program (SMP), through an operation called the ‘weekly drain’. This could in theory be seen a backdoor way of putting adding liquidity through the financial system without requiring treaty change. This should be seen as EUR negative.
It’s also interesting and hardly surprising to see the yield on the US two-year treasury trading on a twenty-five basis point premium to the German bund. If you think yield spreads have a strong influence on currency valuations, you can see why EUR/USD is now trading below 1.3500. Traders will be keen to look out manufacturing data across Europe and the US later today, with US manufacturing expected to expand a slightly slower pace, and one suspects USD/JPY will be the pair to watch, while emerging market currencies/bonds/equities/CDS will also be in focus.