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Market Update

Draghi Delivers— Europe Gets More Cushion

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January 22, 2015

Global stocks collectively cheered the European Central Bank’s (ECB) stimulus package, a package tied with a neat bow as the announcement contained little surprise for investors. In his post-meeting press conference, ECB chief Mario Draghi delivered the details on a fresh round of quantitative easing European style (more below on that).

With the move, demand weakened for “safety” bonds, sending the benchmark 10-year Treasury yield above 1.9% (be still my heart). Gold has been an interesting mover, too, hitting a five-month high and looking to give the $1300 mark a real test. Now, the true test for stocks comes in staying power. The last several sessions included late-day volatility as market fatigue has crept in. The S&P 500 (SPX) could make a run for resistance at 2050. The CBOE Volatility Index (VIX) indicates a move back under 19.

Decoding the ECB. To help the euro-zone’s $13 trillion economy finally shake off the financial crisis of six years ago, the ECB will purchase 60 billion euros worth of assets each month through September 2016.  Earlier, the ECB as expected kept its main lending rate unchanged at 0.05% and a separate rate on overnight bank deposits parked with the central bank at minus 0.2%, meaning banks must pay a fee to keep surplus funds at the ECB. The euro dropped to around $1.1513 in the immediate wake of the asset news. As with most market drivers, there can be two sides to consider. If QE pushes the euro down to parity or below versus the dollar, European exports would be cheaper for U.S. buyers. That negatively impacts U.S. exports which are already feeling the sting of a surging dollar against a basket of currencies. There’s another way to look at it. A weaker euro in fact exports deflation to the U.S. The U.S. economy is struggling on its own to reflate pricing power (although of course not to the degree that invites inflation—it’s much harder to squeeze out of the economy).

FIGURE 1:

Euro/dollar’s move over past year. The pair traded down near 1.1470 in continued reaction to the stimulus measures. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Tech Disappoints. EBay (EBAY) has been volatile on heavy volume after the company late Wednesday reported adjusted Q4 EPS of $0.90 on revenue of $4.92 billion. That’s not too far off FactSet’s expected $0.89 per share on revenue of $4.93 billion for EBAY. The news didn’t stop there. As anticipated, the company said it would cut 7% of its workforce, about 2,400 jobs. It also issued a Q1 outlook below  Wall Street’s view. EBay entered an agreement with Carl Icahn, the company’s largest active shareholder, over corporate governance. Other tech firms could tug on sector sentiment, too. SanDisk (SNDK), a storage device-maker, reported a 40% drop in Q4 profit over a year earlier. F5 Networks (FFIV) shares tumbled in earlier action as it issued a weaker-than-expected outlook for the current quarter. We shift to blue-chip focus Friday with GE (GE), Honeywell (HON), McDonald’s (MCD) earnings on tap.

Confusing Claims Number. The number of people who applied for U.S. unemployment benefits in mid-January fell by 10,000 but remained above the key 300,000 level for a third straight week, the first time for that streak since July. Initial jobless claims declined to 307,000 in the seven days ended Jan. 10 from a revised 317,000 in the prior week, the Labor Department said. Also, the government said continuing claims increased by 15,000 to a seasonally adjusted 2.44 million in the week ended Jan 10. There’s not enough evidence to worry (yet) about the job market recovery as this time of year can be hard to analyze because of holidays and the risk of poor weather. I say let’s keep an eye on upcoming data before jumping to any conclusions. But some analysts are already asking if energy sector layoffs could start to sway the broader reading?

Good trading,
JJ
@TDAJJKinahan

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