October is usually a bad month for equities but this one has been one of the best thanks to the promise of more stimulus measures from the ECB, a rate cut in China, and low or negative interest rates elsewhere. A slightly more hawkish Fed and the Bank of Japan's decision to refrain from expanding the pace of money printing overnight failed to spoil the party and the Nikkei actually closed in the positive territory. In Europe, the markets are trading a touch lower today while US indices are also struggling for gains. With a gain of over 11%, the DAX has had its best month since April 2009, while for the US indices it has been the best month since October 2011. Profit-taking ahead the month-end and weekend may therefore be among the reasons behind today’s lacklustre performance. European markets are also held back as EUR/USD – which has a tendency to move in the opposite direction of stocks – has regained some lost ground on the back of mixed-bag Eurozone data and after the disappointing US third quarter GDP on Thursday was followed by some more weaker figures that have just been released.
German retail sales for September came in flat when a 0.4% month-over-month increase was expected; French Consumer Spending was likewise flat versus a 0.2% increase expected, and Spanish GDP grew 0.8% in Q3 compared with forecasts of 0.9%. Then we had the latest inflation and unemployment data from the Eurozone, which were slightly better. The headline Consumer Price Index (CPI) was flat year-over-year in October as expected and compared to -0.1% the month before, while core CPI rose to 1% from 0.9%. The rate of unemployment unexpectedly fell to its lowest level since Jan 2012, down to 10.8% from 11.0%. From the US, the Employment Cost Index rose 0.6% in the third quarter as expected, while the Fed’s preferred measure of inflation, the core PCE Price Index edged only 0.1% higher month-over-month when an increase of 0.2% was expected. Personal income and spending rose by 0.1% each – again disappointing the expectations. Chicago PMI was the only bright spot though this was overshadowed by a surprise downward revision in the UoM Consumer Sentiment index.
Although the Federal Reserve was less vocal about the slowing pace of global recovery in its policy statement on Wednesday, concerns over China may come back in focus early next week for we have the official manufacturing PMI data on Sunday, followed by the Caixin PMI on Monday morning. In addition, there will be plenty of US macro pointers, including the ISM services PMI and the all-important October jobs report to look forward to next week. If these numbers also disappoint then a December rate increase will be very unlikely, which would mean low interest rates for longer and therefore good news for US stock markets.
On the earnings front, the third quarter results from the S&P 500 companies have been coming in thick and fast over the past couple of weeks and although there will be some more important numbers next week, such as Facebook on Wednesday, the reporting season will soon wind down. About 60% of the S&P 500 companies have reported their results now. After a slow start, some 71.4% of these companies have beaten EPS estimates and 42.9% coming ahead of revenue estimates, according to research from Zacks. Earnings are up 1.8% from the same period last year while revenues are 1.7% lower. Results have been mostly better from the technology and medical sectors and unsurprisingly very weak from the energy, industrials and basic material sectors due to the struggling commodity prices. It is the retail sector that will dominate the earnings calendar next week.
So far the S&P has not shown any technical signs that would strongly suggest it is about to turn lower, although the index is now looking a little bit overbought as highlighted for example by the RSI climbing towards 70. The short-term support that needs to hold now is at 2080; if this level breaks down then the index may initially drop back to the 200-day moving average at 2062 before potentially going for the next supports at 2040 and then 2020. On the upside, there is little further resistance from here until the previous record high of about 2036/7 that was achieved back in May. There are however a couple of Fibonacci extension levels that need some close monitoring around 2114/5 and 2171/2 (i.e. the 161.8 and 200% extensions of the BC swing), and then at 2219/20 (127.2% extension of XA).
Figure 1:
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