Lessons for the Coming Week Part 2: Top Global Market Drivers

What all traders of forex, stocks, commodities need to know this week & beyond

The following is a partial summary of the conclusions from the fxempire.com  weekly analysts’ meeting in which we cover the key lessons learned for the coming week and beyond.


A quick overview of leading global index for the past week makes it clear that something big happened last week, and that we’ve some lessons to keep in mind for this week and beyond


Was The Selloff The Start of Something Bigger?


The technical picture thus far shows nothing more than a normal pullback. The actual fundamental blemishes are mostly not new. See here for details and what next week could bring to change a normal bull market pullback into a deeper selloff.




Fed Taper Speculation: Latest Hilsenrath Omens

The big news Tuesday was a WSJ article but unofficial Fed mouthpiece Jon Hilsenrath, who wrote that the Fed could cut its monthly bond purchases to $65B from $75B at the FOMC meeting this week, as it remains bullish on the US despite the latest weak US monthly jobs reports. Of course the big question is how the FOMC will communicate its intentions about the pace and timing of actual interest rate increases.

This hint at further tightening, along with a liquidity shortfall and possible default with systemic risk in China, contributed to the troubles in emerging market currencies and last week’s overall selloff, as noted above.


Earnings: The Big Story That Wasn’t

Given the past week’s calendar, it appeared as though earnings could be the big story this week, but they were upstaged by developments regarding China, Fed taper speculation, and the emerging markets selloff.

Per John Butters of Factset here

-Earnings Scorecard: Of the 123 companies that have reported earnings to date for Q4 2013, 68% have

reported earnings above the mean estimate and 67% have reported sales above the mean estimate.

-Earnings Growth: The blended earnings growth rate for Q4 2013 is 6.4%. The Financials sector has the

highest earnings growth rate for the quarter, while the Energy sector has the lowest earnings growth

rate for the quarter.

-Earnings Revisions: On December 31, the earnings growth rate for Q4 2013 was 6.3%. Four of the ten

sectors have recorded increases in earnings growth rates over this time frame, led by the Information

Technology sector.

-Earnings Guidance: For Q1 2014, 18 companies have issued negative EPS guidance and 7 companies

have issued positive EPS guidance.

-Valuation: The current 12-month forward P/E ratio is 15.1. This P/E ratio is above the 5-year (13.1)

and 10-year (13.9) averages





Source: Factset.com here

06 jan 27 1403


Our take thus far: Although the few companies that have issued forward guidance have mostly given negative outlooks, the good news is that we’re not seeing a widespread cutting of estimates for the full-year, at least not yet. We’ll have a better picture of the full-year 2014 guidance after next week, which is the heaviest week of SP 500 companies reporting. Most companies will give full-year 2014 guidance with q4 ’13 earnings and analysts will adjust their models and update their full-year 2014 revenue and earnings estimates following management’s guidance.



The Likely Driver

On Friday January 17th, Moody’s upgraded Ireland’s rating to investment grade and Standard & Poor’s removed Portugal from its ‘credit watch’ list. Last week demand for GIIPS bonds and stocks continued to be brisk, with at or near multi-year highs. Although the market seems unduly sanguine about the numerous and growing risks in the EU (see here and here), there may be another explanation for the bull market in EU periphery assets – the search for yield in an era of financial suppression. Like the S&P 500’s climb to record highs on less than supportive fundamentals, European assets – particularly the riskier ones– are drawing yield-hungry investors as the huge cohort of baby boomers attempts to build savings and passive income streams. That may allow these assets to continue higher until their yields get too close to those from more stable economies, but it also makes the euro more exposed to risk. The more these assets rise, the more room they have to fall if there’s a new bank solvency problem and no rapidly deployed backstop to ensure that depositors and debt holders don’t flee. That could turn a mere possible problem into a crisis, as we’ve discussed here and here.


Spain Seizes The Moment With Biggest Syndicated 10 Year Note Sale In History


On Wednesday Spain joined the powerful new year rally in Eurozone “periphery” (aka GIIPS) debt markets to issue a €10bn 10-year bond on Wednesday, after receiving orders worth almost four times as much. The yield was down to 3.845% from 4.45% on 10 year notes issued last May. The rally is based increased investor confidence that Eurozone crisis risk is way down and its worst-hit economies are turning around.

Spain’s GDP rose 0.3% in Q4 2013 – its fastest quarterly growth in over six years. Its unemployment rate has also fallen steadily since the summer of 2013, but at more than 25 per cent is still among the highest in the western world.

Spain’s far reaching 2012 labor market reform, which experts say has helped lower wages and make Spanish exports more competitive, also adds to its recovery story.

The €10bn issued was the largest in Eurozone history for a sovereign bond deal syndicated among large investors by banks, as opposed to one directly auctioned by a debt office. See here for further details, and here for why we believe these bonds are far riskier than their prices suggest.

Mostly Positive Data For EU This Week


Key results included:

German investor confidence remains strong.

Spain’s tentative recovery continued. Its grew for the second quarter in a row  expanding by 0.3% on quarter, however 2013 GDP fell 1.2%, and unemployment inched higher to 26.03% last quarter from 25.98% in Q3 and was above consensus of 26%.

Eurozone composite output PMI climbed to a 31-month high of 53.2 in January from 52.1 in December and beat estimates of 52.4, with the manufacturing and services sectors improving. However, “the upturn remains fragile,” per Markit.


As noted in our two minute drill overview of global markets, China reported that its annualized Q4 2013 GDP grew 7.7%, down from 7.8% in Q3. The total 2013 GDP expanded 7.7%, tying 2012 for the weakest performance since the 1999. Retail sales, industrial production and fixed asset investment also showed weakness compared to 2012.

Although China’s growth is far stronger than the United States, Japan or Europe, an unexpectedly sudden decline from the double digit rates of the previous decade has complicated the ruling Communist Party’s plans to promote more sustainable growth based on domestic consumption and reduce reliance on cheap credit, exports and investment. It’s clear the boom years are ending, so the focus is on sustaining current growth and employment rates.

The fact that the Chinese GDP slowdown was less than feared was a boost for the AUD, and led to a short-covering driven mild rally in the AUDUSD this week that may signal a bottom for now. That said, traders remain overall strongly short the pair, as they anticipate Fed tapering strengthening the USD while China weakness radiates to its Australian commodities supplier and keeps AUD rates steady or falling further.


Of more immediate concern is China’s looming default threat, which we covered in depth last week here, and updated here. Remember, the total invested in these wealth management products is estimated at roughly 60% of China’s annual GDP. No one knows who is exposed, but with that kind of nation-wide exposure, if confidence in this asset class is shaken, and it would be unless officials step in, we’ve the ingredients of a systemic crisis in China. As we note in here, HSBC has already limited depositor withdrawals as of Friday evening EST.

China Stocks Aided by New IPO’s, PBOC Easing Tuesday


  • After jumping another 153 bps on Monday, China’s seven-day repurchase rate fell 88 bps to 5.44% Tuesday after the People’s Bank of China injected over 255B Yuan ($42B) into the financial system and expanded a loan facility in order to ease credit conditions and boost liquidity ahead of the Lunar New Year.
  • The PBOC’s move helped boost the Shanghai Composite 0.9% and the Hang Seng by 0.5%.
  • Shares of eight newly listed companies jumped on their trading debuts Tuesday, highlighting the strong demand for new listings after the end of a year-long moratorium on IPOs. Demand for shares of new IPOs has been so strong that the Shenzhen Stock Exchange warned investors about “blindly” speculating in IPOs.
  • The rally last week is mostly seen as a relief bounce after a six week downtrend due mostly to worries over tightening credit conditions as the PBOC tries to reign in reckless lending without hurting growth.
  • But was the easing real? China’s Beige Book, a quarterly survey of Chinese businesses and banks, claims that banks have cash to lend but “fewer and fewer firms are doing any borrowing … credit is largely being siphoned off by a privileged elite…Bankers and the government may insist the credit spigot remains open, but it is not open for most and liquidity is not financing genuinely new economic activity.”(via seekingapha.com’s market currents for Wednesday here).


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