Markets celebrated the 25th anniversary of the 1987 stock market crash with a fall Friday. Key to the disquiet is the earnings reports and outlook which are being released in the US at the moment. Friday’s close saw the Dow off more than 200 points and 1.5% while the S&P 500 fell 1.7% to 1433.
The S&P finished the week roughly where it started but felt much weaker both fundamentally and technically. There were many companies that missed last week, big bellwether companies like IBM and Microsoft but the best indicator of what is really happening in the global economy is the report by McDonalds and comments from its CEO. The Wall Street Journal reported the CEO said that McDonalds:
is losing momentum world-wide, with sales at restaurants open at least 13 months falling so far in October compared with the same time last year. Such same-store sales are a key indicator of restaurant chains’ strength, and McDonald’s hasn’t seen declines by that measure since April 2003.
“It’s been very rare that we’ve ever seen all of our major markets experiencing the impact of these kind of global economies at the same time,” the CEO said.
I have been warning that I felt this earnings season might be akin to what we saw in 2007 and it remains a view I hold as only 41% of companies are actually managing to “beat” the street against the usual 62%. More banner earnings this week and a big announcement from Microsoft will likely continue to pressure US stocks. So while the S&P 500 hasn’t yet broken the downtrend line we highlighted last week, it seems like it probably will. This will drive a risk-off move and for me see the S&P drop toward 1370 for a drop of around 4%.
European markets were off less than the US markets so it’s probably going to be a bit of an ugly day in Asia today and then Europe. The FTSE closed down 0.35% Friday, the DAX dropped 0.76% and the CAC was off 0.87%. Europe remains a fulcrum and the Spanish elections held over the weekend may have been the reason that Spanish PM Rajoy hadn’t yet asked for the bailout most expect will come. We’ll see but the election results will also be important in indicating the move toward a Catalonian secession.
In FX land, the weaker equity performance was naturally good for the US dollar and it strengthened across the board. The euro reversed nicely off double trend line resistance and closed around 60 points below the high of the day as it continues to map out a big old pennant by the looks of things. USDJPY is up at its highest level since August and the Japanese will be hoping the US dollar’s strength finally translate to proper Yen weakness. If the dollar’s strength is sourced in stock weakness the Yen’s fall is likely to me tempered. Sterling’s weakness continued as well.
With regard to the Australian dollar, the weaker stock market performance is a natural hand brake on its appreciation but it will be interesting to see if there is any market impact from the release of the Australian Government’s Mid Year Economic Outlook today. Will it wake traders and investors up to the fact that Australia faces all the same issues as the rest of the world and we just had a better starting point? If a country that has had a mining boom is undertaking the same sorts of spending cuts that we are seeing elsewhere in the world as it tries to print the much heralded “surplus” then where is the real difference? The RBA will be fretting because the Australian dollar’s strength is doing a lot of harm to the Australian economy when the history since the float in 1983 has always been that it has acted as a shock-absorber. But in the currency world of least ugly the Aussie dollar still stands out.
On Commodity markets crude pushed sharply lower falling 2.23% and close to a trend line break – not yet put possibly soon – remember though we never pre-empt. Gold likewise was off 1.18% to 1722 oz. Our longer term daily trading system went short a couple of days ago. $1712 is the 38.2% retracement off the recent high. The Ags did their own things for a change with corn up 0.10%, wheat up 0.43% and soybeans fell 0.73%.
Lets have a look at some Met4 charts from my AVATrade platform.
EUR/USD: We got the move lower we were looking for Friday with EUR moving into the 1.3000/15 region we identified off the MACD, or at least the way I use it. I’ve had another look at my charts – I always find its good to take all your lines off every now and again and start from scratch and you can see that the high last week was at the convergence of two trend lines – reinforcing that we have probably seen a top for now and a decent pullback is required.
The daily and 4 hour up-trends remain intact – for now – so we aren’t going to get too bearish just yet but my sense is that unless the EUR can get back above 1.3040 today, more downside is favoured toward the 200 day moving average at 1.2921.
AUD/USD: On Friday we said that the AUD was “biased back toward the trend line support shown on the chart below at 1.0330” and we saw that Friday. Like the EUR above it is often instructive to take all your lines off and start again and it’s interesting that we have a trend line where the AUD pulled up last week – someone was watching that!
On the 4 hour charts my indicators are suggesting that a push below 1.0315 will see the move accelerate toward 1.0275/80 and if that breaks 1.0200/10.
Data: MYEFO will be interesting today, and while there is little else out tonight attention will be turning to the CPI later this week and whether or not it will allow the RBA to cut rates again soon. Certainly more fiscal tightening in MYEFO suggests they might need to.
Here is how the markets ended the week.
Twitter: Greg McKenna . He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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