Market Review 10/2019

The S&P 500 index grew by more than 2% in October but this result does not reflect the dynamics within the period. During the first week, we witnessed a correction, which began in mid-September. The index dropped to 2857 points, the mood changed and the market went north. As a result, the S&P 500 demonstrated a 6.7% gain from the mentioned local lows, reaching the value of 3037 points and thereby setting new historic highs.

Reporting season creates optimism

It appears that investors were very optimistic about the 3rd quarter reporting season, which started at the beginning of the month. In October 71% of the companies in the S&P 500 had reported, and the EPS readings surpassed analysts’ expectations in 76% of the cases. In terms of revenue, the results were slightly less impressive with only 61% of the companies in the index reporting better than expected. Against the backdrop of risks of the global economic slowdown, analysts have built their models with a more cautious approach, while it turned out that American companies feel much more confident in comparison to the rest of the world. As a result, bolder risk assessments provoked investors to buy “cheap” shares.

Companies in consumer goods sector, technology and health care reported better than expected in 83% of the cases. Energy sector, miners and the real-estate industry have done worse since those are quite sensitive to the global slowdown.

Trade wars ease but challenges remain

In October, trade negotiations between the US and China surprisingly went much more smoothly than before. Whatever the motivation of the U.S. president’s administration is, be it the desire to inflate market indices (as one of Trump’s own factors determining his performance as the leader of the nation), or the desire to protect the interests of the US companies, or both, the results exceeded all expectations. Risk factor of trade war finally decreased and that added to investors’ optimism. In late October President Trump announced a “Phase One Trade Deal”, which involves China committing to increase purchases of US agricultural products and transparency of the currency markets, while accelerating the opening of its financial sector. While financial markets welcomed the announcement, data continued to suggest that the US economy is losing its momentum. Consumer confidence fell 0.4 points to 125.9 in October and the pace of job growth slowed. However, real GDP growth for the third quarter was more positive than expected – US economy grew at an annualized pace of 1.9%.

Last day for Mario Draghi

Those same trade wars continue to weigh on the Eurozone due to region’s significant dependence on international trade. Labor and consumer markets are feeling the effects of the economic slowdown – employment is increasing at the slowest pace since December 2014 and flash PMIs continue to stagnate. European Central Bank meeting marked Mario Draghi’s final press conference as president and now former head of the International Monetary Fund, Christine Lagarde, will take the office. The main challenge for her will be convincing EU politicians to loosen the fiscal strings to stimulate the economy.

China cuts reserve ratio

China’s annual pace of real GDP growth eased to 6.0% for Q3 compared to 6.2% in the previous quarter. Weaker growth is also slowing Chinese demand for external goods, therefore imports fell by 8.5% YoY in September. After last month’s 50 bps cut in the reserve requirement ratio, the People’s Bank of China made a second 50 bps cut, collectively releasing approximately 1% of GDP into the banking system, as a result the social financing and new bank loans picked up.

The picture in “cable” is changing

Brexit continued to be a story with hardly an ending in sight. Still, with optimism prevailing in October, short “cable” positions were reduced and a move to GBP/USD 1.27-28 materialized quite fast and even more so, the pair traded as high as 1.30, which might be a signal that the picture overall is changing. Now, any levels closer to 1.25-26 mark can be considered as a “buy” signal for the pound and 1.35-36 levels seem to be the new point of resistance. In any case, it is not as comfortable to be short the pair as it was a month ago. In EUR/USD pair the trend is still negative, but Euro managed to climb to 1.1160 mark and that was a warning signal that also in this pair things might be slowly changing. Should EUR/USD go above 1.12 mark and hold this level – it is another warning that change in the trend is coming.

Metals return to calm waters

Both silver and gold were back to boring sideways trading and there is not much to add to last month’s comments. In gold – XAU/USD 1550-1580 area sees very important resistance and a correction lower would be considered healthy. For silver bulls – the market above 16.30 dollars per troy ounce keeps the trend alive. However, with current market mood the strategy of trading XAG/USD 16.70-18.70 range for the next few weeks seems quite logical.

Federal Reserve did not disappoint this time

So, stock market is at fresh all-time highs, quarterly reports are strong and economic news are positive, so a rate cut cannot happen in an environment like this, can it? Still, market demanded 25bp cut and Federal Reserve did not disappoint this time, though it became clear from Chairman’s rhetoric that the short cycle of rate cuts has ended and now it is time to wait and see the results of it. Mr. Powell assured that the decision to cut was made in order to preserve the stability of the American economy in the face of global challenges. Besides, the Fed assured market participants that it would continue its “non-QE” program at least until the first quarter of 2020, the essence of which is to buy low short term bonds from the market. By the way, the Federal Reserve’s balance sheet has grown by 258 billion since September, which is equivalent to about 6 months of “Quantitative Tightening” and by itself is quite a stimulus for the market.