World Stock Indexes Trading - page 4

Before the joint committee of Congress (Senate and House of Representatives), Janet Yellen reiterated its confidence that the US economy is recovering, based on the improvement of the labor market and the factors that are limiting inflation should diminish in next year.

In the short term, it is not inconceivable a reversal of the trends of recent months, and the American stock market indices could register a over-performance compared to the European.

Recent issues related to the Fed and the ECB relegated to the background the economic situation in China. Despite the measures taken by the Chinese authorities in recent months, the economy continues to show signs of weakness and it's not already visible which is the magnitude of the slowdown or the extent to which the Beijing government has the situation under control.

The reaction to Chinese economic data, which point to numerous weaknesses should mark the beginning of today’s session. The economic situation in China not only affects several European companies such as oil prices. Early this week, the fall in the oil price (Brent reached on Monday the lowest price since 2009) has been the main theme of the equity markets. In addition to the negative impact on the oil, mining and industrial sectors, the decline in oil prices affect the perception investors have of the world economy. The fall in crude oil price results in part from weakness in demand, which in turn reflects the economic slowdown in some parts of the globe. Moreover, the descent of the oil has another side effect. Crude oil is the main income of many Middle Eastern states and is the foundation of its social policies, usually quite generous. For example, the cost of extraction in Saudi Arabia is less than 10 USD / barrel but to finance its social programs the oil has to negotiate somewhere between 80 and 90 USD / barrel. With oil trading near the 40 USD / barrel, the Saudi kingdom and other Gulf states had to find other sources of financing. Thus, the sovereign funds of these countries have started to sell the assets held abroad. According to the Financial Times, in the 3rd quarter, Arab sovereign funds made at least 19 000 M.USD in redemptions of assets. The real amount is higher to the extent that many investment funds are not required to disclose the transaction of SWFs. According to the Financial Times, in 2015, Saudi Arabia has sold 70,000 M.USD in assets from their fund that manages 670 000 M.USD. In conclusion, if the weakness of oil persists, the equity markets will have to continue to absorb this selling pressure.

The weakness on Wall Street and European markets weighed on Asian indexes. The most affected stock exchanges were Tokyo and Sydney. The Chinese stock markets, whose correlation with the US and European markets is not high, also suffered some selling pressure. Additionally, there are some concerns in the Chinese markets in relation to the high number of IPO (initial public offering) of about 670 companies, despite the new rules adopted to soften its impact. Usually, investors sell shares they hold in order to participate in these IPO.

The decision of the Chinese central bank to favor a devaluation of the Yuan may have a negative effect on European exporters sectors such as automotive and industrial.

Before the meeting of the Fed (Tuesday and Wednesday), the attention of investors will be focused on the evolution of crude oil and commodity prices. Broken the barrier of 37 USD / barrel for oil prices, the selling pressure on the equity markets intensified as previously projected, since it stimulated more short selling in oil, mining and industrial sectors. However, the selling positions either in oil or in these sectors is reaching very high levels, which may feed a short-term technical rebound, as these investors may suddenly quit their positions, thus fueling the upward motion.

Generally, the pattern of this month is characterized by an initial rise during the first week, followed by a correction and a rally at the end of the month. So far, it can be assumed that this pattern is repeating itself, only missing its most interesting part: the year-end rally.

The session will be marked by the expectation of today’s meeting of the Fed. If nothing significant occur regarding oil prices, investors will adjust their portfolios to the US Federal Reserve meeting. Whereas many investors had set up short positions (sellers) in the equity markets (and particularly the most vulnerable sectors such as oil and mining), it is possible to occur a buying pressure, as these investors may close their positions.

The more cyclical sectors and more dependent on the weakness of the Euro (such as automotive, industrial, etc.) should register a over-performance. In terms of indices, the DAX is the most benefited from the weakness of the European currency. The mining sector recorded a sharp appreciation in the Asian session but if such a move be extended during the European session, the recovery is likely to be volatile and once again dependent on oil prices.