Equities “Bailed Out” By Strong Bank Earnings

Global equity markets were mostly higher overnight with the CAC 400 posting the biggest gain of 2.2% while the Mexican market posted the largest decline of 0.8%. Critical economic news released overnight included a softer than expected Chinese consumer price index reading for September, a 2.3% year-over-year decline in Chinese producer price index readings for September, significant weakness in Japanese capacity utilization in August, a 1.5% drop in Japanese industrial production in August, a 1.1% drop in French consumer price index readings for September, a 0.3% decline in Spanish CPI and a 1.2% decline in euro zone industrial production for the month of August. Not surprisingly, the US economic report slate is thin again given the government shutdown, with MBA mortgage applications and the New York Empire State manufacturing index the only scheduled economic data reports today. However, there will be four Fed speeches, one ECB speech and the release of the Fed’s Beige Book late in the session.

STOCK INDEX FUTURES

Clearly, the equity markets were “bailed out” by strong bank earnings yesterday and that optimism has spilled over into the early trade today. However, there is a dark lining from the bank earnings sweep with most of the revenue/profitability at large banks the result of trading and merger and acquisition fees and not from loans and services. In fact, several bankers have expressed concern of increased credit risks with some companies moving to add significantly to bad debt reserves! On the other hand, recent consumer credit reports have not shown an increase in delinquencies and consumer spending patterns are not signaling trouble yet. Therefore, it appears equities will resume climbing a wall of worry off slowing and trade issues with rate cut expectations in the end providing confidence. With the release of the Fed Beige Book this afternoon and an avalanche of Fed speeches today’s trade could be choppy.

CURRENCY FUTURES

The Dollar has apparently rolled over “down” and is likely to slide back toward 98.00 in the coming sessions as the markets anticipate a wave of generally dovish dialogue from a flurry of US Fed speeches today. However, overnight economic data showed significant weakness abroad and, in several cases, noted softening of inflation which in turn should elevate the prospects of foreign central bank rate cuts and lend support to the Dollar. In other words, the dollar bias might be down today but bearish sentiment toward nondollar currency should remain higher than bearishness toward the US dollar. Therefore, it is not surprising to see euro options skews highlight a prevailing bearish posture through very low bullish positioning.

INTEREST RATE MARKET FUTURES

While treasury bonds have not forged a new high for the move this morning the market remains bullishly poised and within striking distance of seven-month highs. Even though the markets have already seen dovish dialogue from the US Federal Reserve Chairman this week it is clear the Chairman is attempting to remain balanced as he indicated the US economy is on a “firmer” footing despite concern about the US job sector. Therefore, expectations for a 25 basis point rate cut later this month remain near certainty (which in the markets can be risky) and expectations for a rate cut in December have reached a very lofty 92.7%. Nonetheless, overnight global economic data was very soft and more importantly a series of soft inflation readings were released which should add a measure of bullishness toward treasuries. However, a major headwind for treasuries could be the fear of an under the surface peeling off QT.

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