Global Stock Benchmarks Rattled

Daily Analysis - 27/07/2015

Equity Indices Across the Globe Battered by Expectations of Another Global Downturn


Renewed concerns surrounding earnings and revenue growth are contributing to the overarching weakness in global equities with major benchmarks sustaining losses and carrying over the weakness from last week’s price action.

S&P Revenue Forecasts Falling

In spite of the positive earnings results from many companies, analysts are rolling back targets for the S&P 500 as revenue growth and earnings are set to falter and even decline amid the deteriorating outlook. After operating several years at the zero bound for interest rates, corporations accustomed to increased borrowing at exceptionally low rates have used proceeds to large fund buybacks and stock repurchases in an effort to drive earnings higher by reducing outstanding shares. However, this strategy is quickly losing relevance the advent of higher interest rates coupled with shrinking revenues force companies to pursue investment in longer-term capabilities. The lack of noticeable capacity and capital expenditures over the prior few years are dramatically impacting the outlook especially as investors fear a shift in Federal Reserve monetary policy will dent the momentum higher. Stocks ended lower last week, with the Nasdaq leading the pack lower, falling -1.12% during Friday’s cash session.


Shanghai Composite Tanks

The flagship Chinese Shanghai Composite is plunging today after extending losses from Friday as concerns about corporate profitability grow. This is the steepest loss since over 8-years with the composite currently trading down -8.41% in spite of additional measures undertaken to place a floor in prices and restore confidence in equity markets. The measures have largely fallen short as evidenced by today’s price action with investors nervously awaiting more data on the economy following revelations that industrial profits fell year over year with falling commodity prices exacerbating the drop. Part of the driver is also expectations that policymakers will continue to ease financial conditions further in light of the circumstances after last week’s manufacturing data showed the real economy facing secular stagnation. Adding to the decline is the weak external picture as global growth dynamics continue to falter.


Athens Exchange To Remain Closed

Weeks after the implementation of capital controls and withdrawal limits from the country’s banks, Greece’s financial markets remain largely shuttered as many businesses, unable to obtain financing, fail by the day. The Athen’s Stock Exchange remains closed in spite of requests by the Greeks as the European Central Bank prohibits the reopening of equity markets amid continued support for the Greek banking system. These measures are expected to last for months on end with some Euro Area members still pushing for a bail-in of large depositors to fill the ever-growing hole in Greek banks. This is tantamount to wealth confiscation, something that will likely not be looked upon favorably by other indebted Euro Area sovereigns seeking to exit from crisis-driven austerity measures. Meanwhile, the Euro continues to gain ground against peers following a late rally on Friday.


EURUSD Equidistant Channel Technical Pattern

Following the Greek passage of last week’s additional measures to secure a new round of bailout negotiations, the Euro recovered modestly from earlier weakness as investors moved back out of haven assets towards risk assets on the renewed optimism that the parties would be able to resolve their differences while securing a stronger outlook for the monetary union. The uptick overnight in the EURUSD pair has seen an equidistant channel formation emerge in the price action with the bias to the upside. The key strategy for taking advantage of the developing pattern is initiation of positions at the lower channel line targeting the upper channel line. A move below the lower channel line could indicate a potential channel-based breakout to be accompanied by renewed momentum to the downside.


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