After yesterday’s gains, markets took a step back today as the S&P 500 dropped 2.00% in the wake of weak U.S. corporate earnings and nervous anticipation ahead of tomorrow’s European summit meeting. In commodities, oil and gold rose 1.73% and 2.99%, respectively. The dollar remained relatively flat against the Euro, sticking to $1.39/Euro, while volatility took a big leap today, spiking 10.12%.
Anemic earnings today suggest mixed economic signals, making it difficult to determine where the U.S. economy is heading. Barring the Netflix debacle, large firms such as 3M and Amazon came in below estimates, with the latter dropping 15%.
Meanwhile, economic indicators appear to indicate we are in a trough. For instance, consumer confidence is now at a 2-year low while the August S&P/Case-Schiller index figure indicated that for 20 major cities, property values fell 3.8% from one year earlier. The continued beleaguered state of the housing market still doesn’t look sit well for the economy with the prospect of more homes heading underwater. If you think the U.S. is bad though, take a look at Europe.
As if Greece wasn’t enough of a concern, Italy’s debt, which is currently $2.64 trillion, is beckoning the need for a serious spending crackdown. The EU has suggested that Italy take measures to reduce pension obligations to bring down its debt load although there is political opposition to this.
Furthermore, non-Euro EU countries have threatened not to approve bank recapitalization if a substantial Greek haircut and the emergence of a strong bailout fund are not first agreed upon.
With regards to the EFSF, the success of its expansion hinges on whether it can be structured into a special investment vehicle that would leverage the fund from $440 billion to $1 trillion. If no resolution regarding the EFSF is reached tomorrow, we will have to wait for another couple weeks when Eurozone finance ministers meet in early November.
As I mentioned yesterday, I don’t want to reintroduce equity exposure until we get a better picture of Europe’s situation after the summit meeting, assuming anything meaningful is done.
As seen by today’s drop, bearish forces are alive and well, and I can’t stress enough the importance of being prepared for an ugly downside scenario, despite our Domestic TTI (Trend Tracking Index) hovering in bullish territory.Contact Ulli