Market commentary: European, US markets recover after Asian stocks slump

After what looked like a dismal start to Tuesday trading with some Asian bourses slumping as much as 6%, European and US markets recovered and posted some gains for the day.

Oil performed similarly, dropping early in the session before recovering to around $32 per barrel. This morning’s session saw most Asian indices recoup some of yesterday’s losses, with the noticeable exception of China where volatility remains very much at the forefront

Most European major indices registered gains in excess of 1%. In Germany, Siemens outperformed noticeably after a solid set of 1st quarter earnings saw its shares rise by almost 9%. The London FTSE 100 was helped along by metals and mining stocks, with Glencore and Anglo American gaining a whopping 8% and 12% respectively. EasyJet however was the biggest loser of the session, losing in excess of 2% after the terrorist attacks on Paris and the suspected bombing of a passenger plane over Egypt led to a fall in revenue.

Twitter stock recovered slightly after yesterday’s executive shake-up caused the stock to drop almost 7%. CEO Jack Dorsey announced the hiring of Leslie Berland, former vice president of global advertising, marketing and digital partnerships at American Express in the role of Chief Marketing Officer. This is the first time the company has hired someone for such a role, signaling to investors that it is intent on turning things around. Twitter has yet to record a profit since going public in March of last year.

In the sovereign bond space, Spain is once again less risky than the UK according to 10 year yields. Eurozone bond yields have gone down following last week’s comments by European Central Bank Mario Draghi about a possible change in policy stance during next March’s meeting.

Eyes down for (Apple) Earnings

A raft of earnings are expected this week, but none will probably attract more attention than the earnings by the Cupertino-based firm. As the world’s largest company by market value, Apple is always in the investor’s spotlight. Apple earnings were released last evening during the US session, and it’s, well, meh.

Fiscal first quarter earnings beat analyst estimates but came in below expectations on revenue and iPhone sales amongst others. Tim Cook described the quarter as a period in which there were "a lot of great things happening in a turbulent environment." The CEO went on to say that foreign exchange fluctuations, specifically the strengthening of the dollar, shaved as much as 15% off its revenues from outside the US, a material figure given that two thirds of Apple’s revenue comes from outside national borders.

The record EPS was however coupled with the first ever forecasted decline in iPhone sales over the next quarter. Apple depends on sales of the iPhone for the bulk of its revenue, including $51.6 billion of its $75.9 billion in holiday-quarter sales, so it's no surprise that this comes as a concern to investors. Apple other products have not been doing so well in terms of revenue.

IPad revenue fell 21% and Mac revenue fell3%. Revenue from other products such as the Apple Watch, Apple TV, Beats headphones and iPods grew by 62% - but that’s a ‘mere’ $4.4 billion, not nearly enough to compensate for a forecasted decline of around 11,2% in the next quarter.

How many central bankers does it take to calm the markets?

Major central banks around the world have helped calm the markets in the past few days. The Bank of England stated that “now is not yet the time to raise interest rates”, pushing rate hikes forecasts to late 2016 at the earliest. The European Central Bank has said it will review its current policy stance in March, prompting investors to price in more easing as Eurozone inflation fails to garner any significant traction. In Asia, the Bank of Japan may have to ease even more if the central bank watchers are correct. This may seem like bad news but support measures are well received by stocks, bonds and, usually, the economy especially in the short-term and in times of market turmoil.

On the other side of the Atlantic, the Federal Reserve is meeting this week and the outcome should be known by 8pm tonight. Fed Chairman Janet Yellen has promised a series of rate hikes this year, but is already facing pressure over the last decision to hike rates in December over recent market turmoil. The Fed’s current baseline scenario foresees four 25 basis point increments over the course of the year, but recent market volatility and possible lackluster 4th quarter growth in the US may put the brakes on that outlook.

Despite recent gains markets are still on edge, and any signal that the Fed is already reconsidering its policy stance would cause yet another bout of volatility – adding fuel to the fire of analysts blaming the current oil and stock market fallout on a demand shock.

So in all probability, the Fed will hold policy steady and affirm the faith in its underlying forecast while acknowledging the global and financial risks, leaving the chance of a March hike strongly diminished. This will be interpreted dovishly, probably more so than the policymakers at the central bank would like.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.