Mere weeks ago the two most important forces of the past years were either being phased out (QE) or were dormant (EU Crisis). Not anymore.
The following is a summary of the conclusions of the fxempire.com weekly analysts meeting in which we share thoughts and conclusions about the coming week's likely top market movers, , moderated, recorded and refined into one or more weekly previews by the Chief Analyst, yours truly.
Prior Week's Market Movers That Should Continue To Be Influential
We expect some of the top market drivers from last week that we discussed in detail in our recent post here to remain influential this week. In particular:
1. ECB Bank Stress Tests
For the first time since the start of the EU crisis, EU banks are likely to face real stress tests. Unlike those of recent years, these are not designed to be lenient public relations tent shows. That's because these tests are the ECB's last chance to discover any hidden skeletons before it takes ultimate supervisory responsibility for these banks. Therefore it's in the ECB's interest to find someone else to blame before it gets stuck with someone else's mess. However serious stress tests will force the ECB to face decisions about who will pay an estimated 50 bln EUR bill, and that will determine whether or not the EU as we know it can survive.
As we noted in our 2013 forecast last January, the likely twin pillars of any 2013 rally would be:
- QE continues to work (and by implication, remains in place)
- No EU crisis and contagion outbreak
QE appears to now be safely in place, thanks to a more dovish fed that's been handed a weakened US economy from the recent government shutdown, ongoing sequester (automatic spending cuts), and uncertainty about yet another debt ceiling battle in the coming months.
However the new, real stress tests mean the EU has to decide how the costs of recapitalizing bad banks will be allocated among private and public sectors. As we discuss here, that might not be possible as EU leaders must find a solution that doesn't provoke a rebellion among tax payers/voters, or depositors and investors who could flee and crash markets.
Stress tests are to begin in November, so make no mistake, this one could be huge and is the first event that could awake the hibernating but very-much-alive EU crisis. Remember, the EU has done nothing over the past year but buy time. There has been no material progress towards either of the two paths to contain and prevent another sovereign and banking contagion threat:
- Unification of EU banking (that's what the ECB is attempting to start)
- EU Breakup or other means of building a firewall around specific threats to the EU banking system, be they specific banks or entire sovereign nations.
With US and German elections now over, many have predicted this would be the time when the EU and global leaders get back to work on a resolution of the crisis. Good luck to them.
2. QE Back, Markets Return To Pre-Taper Behavior
After months of speculation on QE taper or the US debt ceiling, markets will return to viewing news and events as bullish or bearish depending on whether they extend or reduce QE duration expectations.
3. Earnings May Still Matter
The tone of earnings season is usually set by the end of the third week because so many of the leaders in each sector have already reported, markets have a good idea of what the others will report. However much of this week's calendar's top tier data from the US is late, and the FOMC meeting is believed to be a non-event given the low likelihood that it makes any changes to QE any time soon. So Q3 earnings may yet matter, especially if they're positive and reinforce the upward technical momentum. See below for the top names reporting this week
4. China: Credit Crunch Scare
If benchmark Chinese interest rates continue higher that would be a headwind for markets, especially in Asia, for a variety of reasons we discussed in the above referenced article.
For details on all of these, see here.
5. Top Earnings Reports This Week
Market open and close times refer to New York, EST time.
- Monday: Merck (MRK) reports before the open, Apple (AAPL) after the close (and so may influence Tuesday).
- Tuesday: BP, Nokia (NOK), Aetna (AET), Pfizer (PFE), US Steel (X), Goodyear (GT), all report before the open, LinkedIn reports after the close.
- Wednesday: Nintendo, Chrysler, General Motors (GM), and Sprint (S) report before the market opens. Facebook (FB), Kraft Foods (KRFT), Marriot (hotels) (MAR) and Visa (V) report after the close
- Thursday: Sony (SNE), Royal Dutch Shell (RDS.A), Time Warner Cable (TWC), Exxon Mobil (XOM), and MasterCard (MA) report before the open. Starbucks (SBUX) reports after the close.
- Friday: Chevron (CVX) reports before the open.
6. Other Top Calendar Events
Events marked 'delayed' were held up due to the US government shutdown and reflect monthly data that is already over 2 weeks old.
- Monday: US pending home sales
- Tuesday: US retail sales (delayed), PPI, CB consumer confidence (delayed)
- EU: German preliminary CPI, Italian and German 10 year bond sales
- US: ADP non-farms employment change (delayed), CPI, FOMC statement
- Japan: BoJ monetary policy statement and press conference
- US: Weekly new unemployment claims, Chicago PMI (delayed)
- China: Official manufacturing PMI (focuses on bigger state run companies more than the HSBC manufacturing PMI issued earlier, which focuses on smaller and private firms), HSBC final manufacturing PMI
- US: ISM manufacturing PMI (delayed)
7. Technical Bullish Momentum
As always, all of the above occurs against a backdrop of entrenched long term uptrends on the leading global indexes.
Coming Week's Top 7 Market Movers: QE's Back, EU Crisis Too?
Sample Of Weekly Leading Global Stock Indexes July 2012 - Week Ending October 25, 2013, From Top To Bottom: Left Column, S&p 500, Ftse100, Dax30, Middle Column: Cac40, Djeur50, China A 50, Right Column Nikkei 225, Hsi, Msci Taiwan
01 oct 26 21 26
Using our preferred (and representative) longer term risk barometer, the S&P 500 weekly chart as an example, it continues to show clear continuation of upward momentum.
S&P 500 WEEKLY CHART JAN2012 - PRESENT
02 OCT 270925
Note in particular:
The index remains firmly in its double Bollinger band buy zone. See here for an explanation of the basics of double Bollinger bands and why they're so useful, especially when at historical highs and we've no support or resistance to reference.
All EMAs trending higher, with shorter duration EMAs (the most sensitive and prone to change first) on top of longer durations, showing recent momentum is higher as well as longer term momentum. 10 week EMA (dark blue), 20 week (yellow) 50 week (red) 100 week (light blue) 200 week (violet)
These primary gauges of risk sentiment thus remain bullish. Except for Chinese indexes, most continued higher or held their ground at or near all time or multi-year highs. That means tends to give markets a bias to giving more weight to news that goes with that trend (good news) and to shrug off bearish events unless they're very bearish.
Such is life on Planet Ponzi QE.
One Clear Lesson: Don't Neglect To Diversify Your Assets By Currency Exposure
The Fed is back to creating $85 bln/ month to buy US treasuries and mortgages
Japan is committed to its own extended QE
The ECB is about to start stress testing banks, and correctly demands that the EU provide a "backstop mechanism" (aka money) to stabilize or close the insolvent banks they expect to find and guarantee at least a chunk of the deposits, bonds, etc. Will EU leaders hit voters for the money and risk losing their jobs, hit investors, depositors, and creditors, and risk a market crash, or will they ease the pain with printed money? Hmmm, now let me think….
The point is, anyone with most of their wealth denominated in or linked to the USD, JPY, or EUR should really (really) consider getting increasing their exposure to currencies less likely to be debased and more likely to hold their value. See here for details on a book designed to show how, using safe, simple methods that don't involve any more risk or complication than standard stocks or bonds.
Or, you could just trust these governments to protect the value of your money. You decide.
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Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.