The following is a partial summary of the conclusions from the fxempire.com weekly analysts' meeting in which we share thoughts about what's driving major global asset markets. The focus is on global stock indexes as these are the best barometer of overall risk appetite and what drives it, and thus of what's moving forex, commodities, and bond markets.
It's a quick summary of last week's international stock market action and what drove it. It's our starting point for our follow up articles on:
- Lessons For The Coming Week And Beyond
- Coming Week Top Market Movers
- EURUSD Outlook
- Related Special Features: Stay tuned for a coming piece on some disturbing developments in 'solved' EU sovereign debt and banking crisis.
The exact mix of articles varies somewhat from week to week, depending on what's likely to be most important for the coming week and beyond. You can find all of these here as they come out over the weekend. You can skim it in about 2 minutes, or take a bit more time to study it. A useful weekly summary of what's driving global asset markets, very useful for putting you into context for the coming week.
That's why I write it as part of my own research and analysis.
The Main Question: Why The Markets' Fear, Then Embrace, Of US Jobs Data Friday?
The most remarkable thing about the past week's action the leading global stock indexes was this: all week long market retreated on fears of a good jobs report because it could bring an early end to the thing everyone believes is driving the rally, the Fed's QE 3 bond buying program.
Then, when faced with the dreaded good data, markets reacted to it in the opposite manner, and rallied strongly on Friday in Europe and the US (Asian markets were already closed and will probably show a catch-up reaction bounce higher when they open Monday January 9th).
Here's a look at the daily market movers and a brief explanation for why the sudden change in attitude towards positive US data that we saw on Friday. We'll look at this in greater detail in our post on lessons for the coming week here.
MONDAY: US Manufacturing PMI Beat Fans Taper Fears, Pressures Global Stocks Monday and Tuesday Asia
Asian indexes were mixed, as the only top tier data, the Chinese manufacturing PMI reports were contradictory. Perhaps the indecisive trade was also due to caution after China's escalating its dispute with Japan last week by declaring skies over the disputed islands an air defense identification zone, and how US VP Joe Biden's visit might influence events? He is not known for his diplomatic skills. With so many stock markets at multi-year highs, and thus pricing in good times ahead, they could be vulnerable, though thus far they haven't shown much worry.
European Indexes were all down to varying degrees ranging from -0.04% (DAX) to -0.91% (Spain). Other than London's FTSE 100 (-0.83), most others were down less than 0.50%. Positive Swiss, UK, and US manufacturing PMI reports were more than offset by poor PMIs from France and Spain. The selloff was blamed on a combination of:
- German steelmaker ThyssenKrupp failing to find a buyer for its Brazilian mill
- Concerns over profit margins of UK retailers
We would add that many leading European indexes entered the week at multi-year highs, and so were vulnerable to profit taking ahead of such an event-packed week as this one. In addition, the solid US manufacturing PMI report came out at 3pm UTC, meaning London was still open but Paris and Frankfurt already closed. That may explain why London was down so much more than Germany and France.
All of the big three fell moderately (Dow -0.49%, S&P -0.28%, Nasdaq -0.36%) on light volume as strong data from the ISM manufacturing PMI survey revived concerns about an early QE taper, particularly because the jobs component of the PMI report bounced 3.3 points to 56.5.
TUESDAY: US Manufacturing PMI Beat Continues To Fuel Taper Fears Asia
Asian indexes were again mixed, though today, unlike Monday, Japanese stocks benefited (+0.6%) from the Yen's continued weakening from both:
- speculation of more BoJ stimulus
- less stimulus from the US as December taper odds rose with Monday's good US manufacturing PMI. A QE taper would likely strengthen the USD vs. the JPY (as well as other currencies), thus further weakening the JPY and helping Japanese exporters and inflation as imported goods' prices rise.
Shanghai was up 0.7% due to a drop in money market rates, which eased liquidity fears.
Markets in both Asia and most of Europe were closed when the report came out Monday, so Tuesday reflected a delayed bearish reaction to it.
All indexes were down hard (FTSE 100 -0.95, DAX - 1.9% CAC -2.65% others down mostly between 1.5-2.5%) in reaction to Monday's US ISM manufacturing PMI beat, which stirs fears of earlier than expected start to the coming reduction in the US Federal Reserve Bank's bond buying program, QE 3, aka "the taper." The report came out Monday after most European indexes were closed.
This broad based selloff was European stocks' biggest selloff since August 27th, with the FTSE Eurofirst300 down 1.5% on the day.
Right or wrong, markets believe QE 3 is the primary prop to global stock prices, so they continue to move with data that is believed to influence Fed sentiment. US employment is the most important metric the Fed considers. The significance of this manufacturing PMI report as a leading indicator for the Friday jobs data was heightened by the improvement in the jobs component of the report.
Continued concerns about an early taper after Monday's manufacturing PMI beat encouraged year-end tax consideration-driven selling as stocks sit at all-time highs, making them vulnerable to any excuse to sell.
WENESDAY: Indexes Remained Transfixed On Friday Jobs Report Indicators And Their Ramifications for Taper Timing Asia
Indexes ended mixed for the third straight day, with most solidly lower. Except for Australia and China, which were up modestly, most were down about 1% and Japan was down 2.2% despite a soon to be announced $181 bln stimulus package to offset a coming sales tax hike in April 2014. There are no clear new news drivers, so this appeared to be a continuation of the consolidation move that began Monday, as well as and a follow through reaction to yesterday's selloff in Europe and the US as good US data revived early taper fears.
All indexes were down modestly to solidly (FTSE 100 -0.34% DAX -0.9% CAC -0.57% SPAIN -0.67%) on continued early taper fears combined with high stock prices tempted further profit taking. Both European and US indexes reversed some of their losses, after the release of the disappointing ISM non-manufacturing PMI survey, because it eased concerns about an early stimulus cut from the Fed.
European stocks were also pressured somewhat by Wednesday's release of Euro-zone services PMI surveys. See our post on lessons for the coming week here for more on that.
The big 3 indexes closed overall slightly lower, (Dow -0.15%, S&P -0.13%, Nasdaq +0.02%). The ADP non-farms jobs report beat expectations, and the ISM services PMI survey missed (and included a steep drop in the jobs component too), so their contradictory results cancelled each other out and didn't move taper expectations.
So stocks took their cue from treasury yields, which hit their highest levels since mid-September; the benchmark 10-year note reached 2.85%, meaning that credit markets believe an early taper (which would pressure yields higher) is more likely, hence the slightly bearish close.
Said Peter Boockvar, chief market analyst at the Lindsey Group, "This is all about interest rates, mixed with a buy-on-the-dip mentality. We will go to 3 percent on a good (BLS) payroll number." (via cnbc.com).
THURSDAY: Stocks Plunge Worldwide On Reduced Stimulus Expectations From Fed, ECB
All indexes were lower on fears of good US jobs data heralding an early taper. European shares were also hit by the ECB's relatively hawkish monthly rate statement and press conference.
Asian indexes were mostly solidly lower (Japan -1.5%, Hong Kong -0.1%. China -0.2%. India +1.2%, Australia -1.34% Singapore -1.15%) on profit taking ahead of Friday's U.S. jobs report that could give more clues as to when the Federal Reserve will cut its stimulus. The drop suggests Asians forecast upbeat data that raises the odds of an early start to the Fed's QE taper.
Almost all down solidly ( FTSE Eurofirst 300 -1%, Stoxx 50 index -0.92%, FTSE 100 -0.18%, DAX -0.61%, CAC -1.17 SMSI/MADRID -1.60%) on concerns about both the Fed (early taper) and ECB (no further stimulus coming, and no mention of new LTRO hurts Italian and Spanish banks).
All closed lower, the Dow and S&P for their fifth loss in a row (Dow -0.41%, S&P -0.41%, Nasdaq -0.12%), after U.S. Preliminary GDP and weekly new jobless claims both beat expectations and thus increased fears of an early (pre-March 2014) taper.
However, note that indexes in the US and abroad remained near their recent multi-year or all-time highs (see charts below), and the week's pullback was on low to moderate volume, suggesting minimal conviction or fear.
We also remind readers that as was the case with advanced GDP, most of the surprise gain came from inventory increases. The debate continues over whether that buildup was a bullish anticipation of higher demand or a bearish indicator of slowing sales (and is thus likely to reverse and drag down Q4 GDP).
See out post on lessons for the coming week here for details on:
- Whether GDP data is really bullish or bearish
- The lessons we can glean from the US and other leading weekly global index charts
FRIDAY: Suddenly Good News IS Good News As Market Jump On US Jobs Report Asia
Asian indexes closed mixed, with most modestly lower. The big exception was Japan, which was up 0.8% on hopes for good US jobs data that would increase the odds of an earlier taper, thus strengthening the USD and driving down the JPY, which would help both exports and the fight against deflation.
Most of the major European indexes were solidly higher, between 0.5%-~1%, breaking their 4 consecutive day drop, the longest in about 6 months, on strong US jobs data and a Nestle earnings beat. The STOXX 50 rose 0.88%, the FTSE Eurofirst 300 closed up 0.7%.
Given the negative reaction to good US economic news earlier in the week, this raised a huge question. Why suddenly did global stock markets reacted positively to the actual US jobs figures, when earlier the week, the mere hint of a strong jobs report had markets dropping on early taper fears?
There were three interpretations floating around:
- Good, But Not Too Good To Advance The Taper
- The US Can Handle An Earlier Taper
- Markets No Longer Fear Rate Shock From Taper
See our post on lessons for the coming week here for details.
All of the big 3 indexes were strongly higher (Dow +1.26%, S&P +1.14%, Nasdaq +0.65%). The remarks for Europe apply here as well.
The Bottom Line: The Charts Tell The Tale
As our sample of leading US and global stock index weekly charts below shows, the uptrend remains in force, especially in the US and Asia. Europe pulled back a bit, but only to its 200 day/10 week EMA, which by itself is not enough to call the rally in European shares into question.
Weekly Charts Of Large Cap Global Indexes With 10 Week/200 Day Ema: Left Column Top To Bottom: S&p 500, Dj 30, Ftse 100, Middle: Cac 40, Dj Eur 50, Dax 30, Right: Hang Seng, Msci Taiwan, Nikkei 225
02 DEC 072047
We'll look more at what these charts are telling us, in the context of the lessons we learned about the fundamentals driving these trends, in our post on lessons for the coming week.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.