Was it really a week ago that stock markets were starting their plunge towards multi-month lows amidst concern that central banks were stepping back against a backdrop of slowing global growth.
Yet here we are almost a week later with US markets posting their best one day performance of 2014, and we have markets once again rising sharply
on the basis that corporate earnings are by and large, coming in in line with expectations.
Before we get too carried away let’s ask ourselves what has fundamentally changed from a week ago
and you have got to say not that much.
Undoubtedly Apple’s numbers were stunning but for every Apple we have a Coca Cola – miss, McDonald’s – a miss, Google – a miss, IBM – a miss, SAP – a miss, Philips – a miss.
None of these are small companies and the fact that none of them was able to meet expectations should worry markets but when push comes to shove you should never stand in front of a runaway train.
Based on this you have to surmise that stock markets are looking past these disappointing earnings reports and are continuing to hang future gains on the prospects for further stimulus,
this time from the European Central Bank, and to pretend otherwise is quite frankly wishful thinking.
This time the reports revolve around the prospect that the central bank could well look at purchasing corporate bonds in the coming months
, in addition to the covered bond program that started this week
While ECB officials have denied that any move is imminent
the nature of the speculation is so ECB, using unnamed sources to plant an idea in the markets consciousness and then let it germinate on fertile ground so that investors can grasp at straws and help push asset prices higher.
With the Fed due to end its QE program next week, markets are therefore more susceptible to the suggestion of further stimulus
as they prepare for the US tap to be switched off.
Let’s hope they’re not too disappointed if the ECB once again fails to deliver
, but for now investors appear to be buying the narrative, with Europe set to open near to one week highs this morning.
In the UK the latest Bank of England minutes
could well make for interesting reading particularly in light of some of the most recent economic data, as UK tax revenues continue to disappoint.
In the lead-up to the last meeting there had been some speculation as to whether other policymakers on the MPC might join McCafferty and Weale
in calling for higher rates. This scenario would be surprising given the weakness seen in some of the data, with the most likely outcome being that the status quo is maintained with respect to voting patterns.
Since that meeting earlier this month we’ve seen stock markets plunge on global growth concerns while inflation has fallen further
, closing the gap to average earnings, while other data has also started to look a little softer.
This weakness here in the UK and elsewhere in the world probably prompted Bank of England Chief economist Andrew Haldane’s comments last week
, which if replicated across the committee could well presage a possible change in thinking with respect to the two dissenters on the MPC and their stance on a rate hike?
If that is the case then it could well make this morning’s minutes rather dated, and for that reason there is the possibility that we could well go back to a consensus of 9-0 at the November meeting in just over two weeks’ time.
In the US the latest CPI numbers for September
are expected to reinforce concerns about weak inflation and act as a reminder to investors about the Federal Reserve’s dual mandate. On an annualised basis prices are expected to fall to 1.6% from 1.7%, reinforcing the Fed’s message of lower rates for longer.
– we continue to trade in an upward channel from the recent lows at 1.2675 with support at 1.2705. We need to clear 1.2900 and last week’s high to target a deeper move towards 1.3000. A move back below 1.2670 could well herald a retest of the 1.2570 level. Below 1.2570 argues for a retest of the 1.2500 level and then 1.2400.
– the pound has broken above the 1.6130 level and looks to be heading higher towards the 1.6220/30 area and trend line resistance from the highs in June. This needs to break to help mitigate the recent downside momentum, and suggest a move towards 1.6300.
– we continue to weaken and have fallen back below the 0.7920 area suggesting a return towards the low last week at 0.7855, on a break below 0.7900. Pullbacks could well find selling interest at 0.7940.
– having failed to overcome the resistance at 107.60 the risk remains for a drift back lower towards last week’s low at 105.20. We really need to see a move beyond 107.60 to suggest a deeper move back towards 108.50. In the longer term it would appear the damage has been done, and we could well head all the way back to the 100.00 level.
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