Volatility Returns with a Vengeance
The capital markets experienced the return of volatility this past week, with stock indexes and currencies feeling the brunt of the world's second largest economy contracting. Political issues are beginning to take shape as House Republicans are discussing the debt ceiling and attempting to garner some concessions. Argentina is back in the news, as its currency dropped nearly 13% this week, while earnings continue to shape the future market direction.
One of the impetuses for renewed fear was the Chinese purchasing manager's index which reflected a contraction in growth. The Chinese HSBC flash PMI printed a reading below 50 for the first time in the past 6-months. HSBC (NYSE:HSBC) reported a flash number of 49.6 in January from 50.5 in December and missing consensus for a rise to 50.6.
At the same time, the US House Republicans have indicated that a bill with no new spending cuts to raise the debt ceiling is unlikely. Investors experience the US congress battling over the debt ceiling in late 2013, and another round would likely generate a further unwanted wall of worry. Their initial feint is to seek a number of specific changes in the Affordable Care Act, renewing fears of a repeat of last October. In addition, confidence in monetary policy has been shaken. It is now well appreciated that forward guidance has become the preferred tool of monetary policy.
In the Emerging market space; Argentina's peso suffered its worst fall since the country's crisis 12 years ago yesterday, plummeting 11% to an official rate of around 7.9 to the dollar. The black-market rate is about 13. The collapse in the peso came after the central bank appeared to have stopped defending the currency amid a deepening of Argentina's current economic woes, which include inflation of 25%.
Earning has been strong, but not powerful enough to drive of the current round of volatility. Microsoft (NASDAQ:MSFT) reported fiscal second-quarter results Thursday that were better than expected. The company had sales of $24.5 billion and 78 cents per share. Analysts had expected revenue of $23.7 billion with a profit of 68 cents a share. Microsoft sold 7.4 million Xbox consoles, while revenue from the once derided Surface tablet more than doubled on quarter to $893 million Bing revenue up 34 percent and commercial revenue was up 10 percent to $12.67 billion.
Netflix's (NASDAQ:NFLX) shares rallied more than 15% Thursday following a stellar fourth quarter as net profit surged to $48 million from $8 million a year earlier. Earnings per share increased to $0.79 topped consensus estimates, and revenue rose 25% to $1.18 billion and also beat analyst expectations.
The technical picture shows that stocks are still in a uptrend but next week could be very important as support levels are likely to be tested.