After all the pain of late August and uncertainty of September stock markets are now roaring again and the S&P 500 has clawed back all its losses for 2015. The price action even suggests we could be at the start of a stock market rally that runs from now until Christmas.
All that was needed to light a fire under markets to end the week was the hint of easing in Europe from ECB president Mario Draghi on Thursday, and a reserve requirement and rate cut in China on Friday.
Calm is restored, situation normal: central banks and monetary easing cures all ills.
Probably not. But for the moment at least, speculative traders in the US are short (sold) S&P futures. They’ll be scrambling while “normal” investors all around the globe will be worried they fretted too much and have missed, or are missing, the boat.
Which is why stocks in the US ended a fourth week of solid gains. Europe did even better and the ASX 200 dragged its feet a little, but it also had a rally of 1.5% last week and it’s rallied another 1% on the futures market on Friday, suggesting a strong open to this week.
The change in sentiment, shorts scrambling, and other investors worried they’ll miss out has allowed the S&P 500 to climb back above its 2015 start. It’s only a small percentage gain for the year but in the context of the ructions of August and September it’s an impressive gain nonetheless.
The S&P is now more than 11% higher than the August low and crucially back above the 200-day moving average. That’s important because so many traders use this indicator as their delineation for bull and bear trends. That’s the set up for a change in sentiment. And, it’s been aided by earnings reports from Alphabet, Amazon and Microsoft.
Locally, the ASX 200 was up a little under 9% from August’s low by Friday’s close and futures are indicating a strong open Monday, which should take it north of 10%. Offshore gains and more positivity will reverberate strongly on the ASX. But enduring troubles for energy markets, as crude languishes and the direction of iron ore – given China didn’t cut rates because the economy is strong – could be a handbrake.
Gains last week no doubt also reflect a hope that if Europe and China are still easing the Fed will stay its hand again at this week’s meeting and also in December. It’s a near certainty that nothing will happen (there isn’t even a press conference scheduled), but December is still not completely off the table. There is a lot of data to flow yet and the Fed may be reluctant to feed any more dollar strength now that both the Euro and Yen are getting hammered again. That’s helped propel the US dollar, in index terms, to its highest level since mid-August.
That’s important. Recall Janet Yellen specifically named US dollar strength as one reason the Fed held fire at the September FOMC meeting, along with conditions abroad.
Looking to the data and events this week, markets will be watching the release of earnings for 3 of the 4 major banks, which are due in the next 10 trading days. NAB is due to report full year numbers on 28 October, ANZ is due to release its full year numbers on 29 October, and Westpac’s audited figures are out 2 November.
Evan Lucas, IG’s Melbourne-based market strategist, did an excellent primer for the results last week highlighting that not only will the market be interested in earnings (and no doubt guidance on futures earnings now they’ve all lifted home loan rates) but also specific issues such as the UK business exit, business lending growth and retail banking targets for the NAB, while ANZ’s Asian outlook and approach under the new CEO is likely to be a focus.
Elsewhere in Australia, the big event is the third quarter consumer price index release on Wednesday. Normally this might be considered a potential market mover – because it impacts views on the RBA and interest rates – but the NAB economics team said Friday that “Wednesday’s result is very much likely to be right on that track (RBA expectations) and thus not expected to swing the market”.
The NAB is forecasting “headline CPI to print at 0.8% for the quarter, up 1.8% for on a year to basis. Underlying inflation, a central focus for the Reserve Bank as a key guide to inflationary pressures (or lack thereof) is expected to remain subdued, up 0.5% for the quarter, up 2½% on a year-to basis.”
One reason the NAB reckons inflation will remain subdued, even though the Aussie has fallen 20% over the past year is they think there will be “relatively subdued exchange rate pass-through”. Their reasoning is the NAB business survey found “the retail industry is only now starting to pass through the higher cost of imports.”
Otherwise it’s a bit of a quiet week on the data front in Australia with import and export prices out Thursday while the RBA private sector credit data is out on Friday.
I’ll also be watching the release of the NAB’s residential property and SME business surveys out Thursday.
Offshore China has a fairly light week with next Saturday’s PMI the main release. That means the highlight globally is the FOMC announcement Thursday morning at 5am AEDT, even though virtually no one expects any change. While the meeting may not be “live”, in a policy sense, Mario Draghi showed on Thursday that words are powerful tools as well. So the FOMC statement is eagerly anticipated for clues about the future path of US interest rates.
Also out in the US this week – and important to the discussion around rates – is durable goods orders on Tuesday, US Q3 GDP and personal consumption data Thursday night and personal income and spending data on Friday night.
In Europe the data has taken on greater significance as a result of Draghi’s effective promise of more quantitative easing. That may sound counter-intuitive, but for forex and stock traders now anything that supports that view is likely to see the CAC and DAX rally and the Euro, languishing down at 1.10, come under more selling pressure.
To that end, the German IFO business survey out Monday is important as is import prices (deflation ahead?), which are also out Monday. The Gfk confidence survey is out Wednesday, along with French and Italian consumer confidence. Unemployment is out Thursday in Germany, along with the all important CPI and PPI data for October. Spanish retail sales and inflation data and broader EU-wide business and consumer confidence data are also out Thursday.
In the UK, which many view as the large economy that might actually increase rates before the Fed, data this week is all important with the release of Q3 GDP Tuesday and consumer confidence on Friday.
It’s a big week for traders and markets. Here’s the NAB’s diary of all the important events and data releases.