Equity rout deepens, US yields drift lower

Summary:

• US indices sank on Wednesday, stocks in Japan and China followed

• Microsoft (MSFT.US) reported better earnings

• US bond yields drift lower on the back of a flight to haven assets

The US stock market already erased all its gains it had made this year as a rout deepened on Wednesday. The NASDAQ (US100 on xStation5) was the worst performing index plummeting as much  as 4.4% - its worst daily decline since August 2011. Its peers did not perform much better as well with the SP500 (US500) sinking 3.1% and the Dow Jones (US30) dropping 2.4%. Looking into the technologic index one may notice that the largest losses were made on stocks such as Nvidia (-10%), Netflix (-9.4%) or Texas Instruments (-8.2%). In turn, when it comes to earnings reported after the market close yesterday it is worth noting the results from Microsoft. The company reported EPS of $1.14 on $29.1 billion revenue, both figures turned out to be well above analysts’ expectations pointing to $0.96 and $27.9 billion respectively. What did the earnings come from? The positive surprise was mainly due to cloud business which brought as much as $8.57 billion of revenue in the third quarter meaning a 24% increase. On top of that the company’s productivity and business processes segment (it includes the Office line) saw revenue equal $9.8 billion which meant an increase of 19%. Finally, the personal computing business saw $10.7 billion revenue. To sum up, as much as 161 companies listed on the SP500 already reported their financial results for the third quarter. The average earnings surprise has been 4.6% so far while the sales surprise has seen 0.85%. These numbers are slightly below the final values seen at the end of the prior season albeit there is still a lot of firms which have yet to post their results hence a lot could change.

The NASDAQ (US100) broke through its 200DMA which was helping bulls since November 2016. From this point of view one may assume that it could be something more than just a corrective pullback. If the index continues moving lower bears could take a stab at heading toward 6200-6300 points. Source: xStation5

The enormous losses on Wall Street as well as in Asia has propelled demand for safe haven assets and this is seen especially in the US bond market and the Japanese yen. Namely the yen is trading nearby 112 against the US dollar this morning meaning more than a 0.2% increase. In turn, the US 10Y yield declined yesterday to below 3.10% from 3.17%. In such environment the US dollar is giving back its earlier gains and as a result the Bloomberg dollar index is trading 0.15% lower on the day. On the other hand, EM currencies have not seen any particular losses so far suggesting that gloomy moods are mostly present across equity markets. The reason behind declines in stock markets may be the fact that global central banks are draining liquidity via shrinking their balance sheets, we mean three banks in particular - the Federal Reserve, the ECB as well as the Bank of Japan. This in conjunction with the stuttering global economy could result in worse earnings reported by firms globally and thereby contribute to lower valuation of stocks. Let’s sum up that the Japanese NIKKEI (JAP225) is trading 3.5% lower, the Shanghai Composite is down 1.7% while the Hang Seng (CHNComp) is down 2%. Stocks in Australia ended the day with a 2.8% slide. Notice that relatively better performance in China could stem from the fact that the authorities have announced an array of measures to shore up the economy and the stock market as well.

The NIKKEI (JAP225) has sunk toward its crucial support trend line. Breaking this level could push the valuation even below 20k points. Source: xStation5

In the other news:

• BoJ’s Wakatabe said that vigorous expansionary economic policies are necessary in the wake of a financial crisis

• New Zealand’s trade balance for September totalled -1560 million NZD vs. -1365 million NZD expected

• Fitch affirmed Australia at AAA with a stable outlook

• SP500 futures are trading 0.2% higher, DAX futures are sliding 0.8%