EU Periphery Stocks, Bonds And Their Risk All Rise Together, China Debt Threats, US Q4 2013 Earnings

The following is a partial summary of the conclusions from the  weekly analysts’ meeting in which we share thoughts about what’s driving major global asset markets. The focus is on global stock indexes as these are the best barometer of overall risk appetite and what drives it, and thus of what’s moving forex, commodities, and bond markets.

It’s a quick summary of last week’s international stock market action and what drove it. It’s our starting point for our follow up articles on:

  • Lessons For The Coming Week And Beyond
  • Coming Week Top Market Movers
  • EURUSD Outlook
  • Related Special Features: Stay tuned for a coming piece on some disturbing developments in ‘solved’ EU sovereign debt and banking crisis.


The exact mix of articles varies somewhat from week to week, depending on what’s likely to be most important for the coming week and beyond. You can find all of these here as they come out over the weekend. You can skim it in about 2 minutes, or take a bit more time to study it. A useful weekly summary of what’s driving global asset markets, very useful for putting you into context for the coming week.

That’s why I write it as part of my own research and analysis.





Asian markets were mixed in quiet trading, with Japan’s Nikkei closed and little news of note.

European indexes modestly higher overall. Banks pulled the indexes up after The Basel Committee for Banking Supervision agreed to relax standards used to calculate and report new, stricter bank leverage ratios, or the amount of capital they retain compared to the size of loans and other risk assets, in order to ease credit conditions for the EU.

These ratios were recently enacted to reduce over-leveraged bank balance sheets.  The big question is whether they sacrificed bank stability for growth and undermined the purpose of the new banking rules. EU banks have higher leverage than the US. See our post on lessons for the coming week for details

The big 3 US indexes all dropped hard (Dow -1.08%, S&P -1.27%, Nasdaq -1.47%) due to a combination of:

  • A continued drag from Friday’s weak jobs and profit taking ahead of a full week’s earnings releases from big name sector leaders, particularly a number of big banks.
  • Pro taper comments from Atlanta Fed’s Lockhart, despite the anti-taper implications of Friday’s jobs reports
  • Goldman Sachs’ announcing that stocks looked overvalued





The major Asian indexes closed mixed, with wildly divergent results, though overall lower (Japan -3.1%, Hong Kong -0.4, China +0.9%, India -0.5%), mostly for the same reasons cited above for the US on Monday.

The leading European indexes were modestly higher (between 0.14% – 0.30%) on above forecast US retail sales and a rally in pharmaceutical stocks when a few of these firms issued upbeat earnings and growth expectations.

US indexes responded more strongly to the same retail data (Dow +0.70%, S&P +1.07%, Nasdaq +1.69%) perhaps because it countered the negative implications of the December jobs reports, and added weight to the argument that this was an aberration due to the bad weather. Although retail figures were good, a number of retailers reported terrible results.

The USD was up on, what else,  but rising taper expectations after remarks from two FOMC hawks on Monday, who are voting members made pro-taper comments, reviving expectations that despite the poor jobs report the Fed will stay the course and cut another $10 bln in asset purchases on January 29th.



All major Asian indexes were up strongly; mirroring US gains (Japan +2.5%. Hong Kong +0.5%, China           -0.2%, India +1.2%), mostly in response to the strong US retail figures, which matter a lot to the Asian economies that supply so much of what got sold. The big exception was Shanghai, which was down modestly, after data showed a slowdown in lending and money supply. See here for details.


European indexes were also higher, between 0.5% and 2%, mostly on a combination of:

  • World bank revising EU growth forecasts higher
  • US retail results Tuesday
  • Lingering effects of eased methods for bank capital reporting requirements from Basel III rule regulators.


The big US indexes were all solidly higher (Dow +0.67%, S&P +0.49%  Nasdaq +0.76%) on a combination of the above European market drivers plus:


Given all of the above, markets could start to discount Friday’s poor jobs figures as an aberration. Meanwhile, the taper remains at most slow and gradual, so we did not seeing a “good news = bad news” response.




Asian indexes closed mixed with modest up or down (Japan -0.4%, Hong Kong +0.4%, China flat, India -0.1%) on quiet news day as investors apparently await new data to justify higher prices. The standout was Australia’s AORD, up 1.22%, as poor jobs data suggests lower rates, and thus a lower AUD that helps the nation’s commodity exporters’ profits.

European equities were mostly slightly down or flat, just below a 5-1/2-year high on Thursday, after being hit by a series of retail sector firms reporting downbeat earnings but miners continued to outperform, perhaps on leaks of Rio Tinto’s (RIO) upbeat news Friday.

The bid 3 US indexes closed mixed, overall modestly lower (Dow -0.38%, S&P -0.13%, Nasdaq +0.09%.) after two-days of higher closes, as disappointing corporate earnings weighed on sentiment. Best Buy (BBY) shares plunged 28.5% after it issued lower guidance due to disappointing holiday sales, a dramatic disappointment that also pressured the retail sector. Financials lagged after Citigroup (C) missed estimates, despite Goldman Sachs(GS), BB&T (BBT), BlackRock (BLK) and PNC (PNC) reporting better than expected results.



Asian indexes closed mixed with widely divergent results, some quite strong, some quite weak, some barely moving either way (Japan -0.1%, Hong Kong +0.6%, China-0.9%, India -0.95%, and both Australia and Korea down about 0.65%). Japan’s losses were minimal due to optimism on coming quarterly earnings.

Most European indexes closed modestly higher (~0.20%), led by miners after Rio Tinto (RIO) reports big production increases. The basic resources sector – which dropped 14 % in 2013 – is up 7% this week, its biggest weekly jump in two years, on signs of a wider economic recovery, particularly in developed countries after years of sluggish growth. That forecasted growing demand in the developed world is expected to compensate for any reductions in demand from China.

Peripheral markets continued their robust 2014 rally, with Italy’s FTMIB up 0.5 %, Portugal’s PSI 20 up 0.3%, and Spain’s IBEX up 0.1%. Since the start of the year, the MIB is up 5.3%, the PSI 20 up 8.5% and the IBEX up 5.5%, easily outperforming a 2.2% gain by the broad FTSEurofirst 300. We’ve repeatedly questioned the long term wisdom of this trend. See here for details, and here  for the latest updates on the increasingly bizarre continuing rise in both periphery asset prices and their risk


The big 3 US indexes again closed mixed but overall lower as mixed housing data and disappointing earnings from Intel (INTC) and GE (GE), as well as earnings warnings from Royal Dutch Shell (RDS) and UPS (UPS) outweighed earnings beats by Morgan Stanley (MS) and Schlumberger (SLB), both leaders in their respective sectors.



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