North American Wrap: What Downtrend?

What Downtrend?

North American markets were all in a tizzy last week as it seemed everything was crashing down around us simultaneously.  Ebola was scary, ISIL was belligerent, Oil was bottoming out, and US data was missing expectations.  RUN!  Well, nary a week later, markets have rebounded from the lows and everyone seems to be a little more calm and levelheaded as volatility has subsided and the S&P500 has finished green for four straight days.  What a difference a week makes!

Of course, none of this happened all by itself.  There have been a few developments that have lessened the severity of the issues at hand; Ebola isn’t as scary as the sensationalism originally sounded, ISIL is turning in to “just another issue in the Middle East,” Oil stabilized near the $80 level, and US data was much better in the second half of last week and this week so far than last.  Sprinkle in a little positivity from Janet Yellen on Friday, a Chinese GDP that wasn’t as bad as most expected last night, an upbeat earnings report from Apple, and the European Central Bank buying some Italian bonds for the second day as its asset purchase program (read: Quantitative Easing) has kicked in to gear, and you magically get a market rally.

The questions now become:  “How long will it last?” And, “Is it sustainable?”  Well, if we attempt to determine those questions based on the previous version of QE we have experienced, then the answer to each should be “a while” and “yes” respectively.  The Federal Reserve has already patented this type of market levitation for years now as QE3 has helped the recovery along.  Heck, when it comes down to it, the Fed was helping equity markets the world over, not just here in North America.  Is it any coincidence that European equity markets have rallied right along with their US counterparts?  I say no.  The Fed’s liquidity parade has had the effect of lifting all boats.

Assuming the ECB’s version of QE performs a similar feat to that of the Fed, European markets may benefit from the most traction of the program, but the spillover will likely feed in to the US equity market as well, supplanting the boost previously received from the Fed.  Therefore, the declarations that we are at the dreaded end to the uptrend or the beginning of a new downtrend may be a little premature due to the fact that net stimulus being pumped in to world markets will actually remain the same or even increase.

Just to balance things out a little, I suppose we could say that QE3 had the counter-effect of creating deflation in the Eurozone.  As confidence increased in the recovery of the global market, risk currencies like the EUR gained strength and was a large factor in the lack of inflation in the region (at least according to ECB President Mario Draghi).  That lack of inflation put the ECB in the tenuous position it is in currently, having to create the asset purchase program.  Will a devaluing of the EUR even further as QE kicks in create a similar disinflationary scenario here in the US?  Tomorrow’s Consumer Price Index release may give us a start toward that answer, but for now it appears a new market rally could be just beginning.

Looking Forward

Speaking of CPI, Australia will be releasing their version of the report this evening that is expected to rise 2.3%, well within the 2%-3% range the Reserve Bank of Australia would like.  Unfortunately, the trend for the figure would be heading in the wrong direction as last quarter’s result was a top ended 3.0% which could depress the AUD as a result.  Japan also has their Trade Balance being released which is often times panned due to its propensity to have very large negative numbers so don’t expect too many significant moves based upon it.