Indices Hit New Low, ECB Stands Pat On Interest Rates

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Indices Hit New Low, ECB Stands Pat On Interest Rates

Earnings Are Good, Outlook Is Cloudy

Global fear escalated to a new high over the last week as the Jamal Khashoggi murder added worry to an already overburdened market. The S&P 500 fell more than 5% in the week, extending the correction to 10%, and it looks like it could go lower. Although the Saudi scandal has raised fear to a new peak it is the underlying fear, that of slowing growth, trade wars, and earnings growth that has the market moving lower. The good news for traders is this, the move lower is driven on fear, over extended, and has the indices poised to rebound.

The technical picture is clear if the outlook for earnings growth has grown cloudy. The S&P 500 has hit a new low and the indicators have diverged from that low. The rebound on Thursday wasn’t strong but it is bullish, trend-following and supported by earnings results so adds weight to the signals shown by stochastic and MACD. The caution I give is this, the indicators are still weak and volatility is still high so it is very possible the index could trend-sideways at this level or even move lower despite my bullish outlook.

My outlook is bullish for two reasons. The first is that earnings growth is still in the forecast. Not only is the current earnings cycle delivering better than expected results but outlook for the next quarter is a strong double-digit figure as is expectation for earnings growth next year. The second reason is that the October correction has brought the market down to more reasonable levels, levels at which institutional money and managed investments will see attractive. This combination is expected to lead the market higher, if not immediately than by the end of the year.

The ECB Stands Pat On Interest Rates

The ECB just finalized their October policy decision and have left rates and outlook for tightening unchanged. The bank is expecting to end its QE purchased in December and to begin raising interest rates late next year. The news was largely as expected and did little to move the EUR until later when Mario Draghi held his press conference.

At the press conference Mario Draghi expressed in words what market watchers need to fear; a hard Brexit. He says the possibility the deadline will be reached without accord is growing and, if it comes to pass, will force the private sector to make a move. In his opinion they will assume the worst and that would have a highly disruptive effect on the EU economy. The EUR/USD had been trading higher on the policy statement, it fell hard on the Brexit comments to set a new three month low.

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Tom Fairless

FRANKFURT — The European Central Bank pushed back a decision on the future of its easy-money policies on Thursday, leaving its large monetary stimulus unchanged amid fractious financial markets and signs that the eurozone economy is slowing.

The ECB said in a statement that it would continue to buy EUR30 billion ($36.4 billion) a month of eurozone bonds at least through September, and would leave its key interest rate unchanged at minus 0.4%.

ECB President Mario Draghi is set to elaborate on the bank’s policy decisions at a news conference, starting at 8:30 a.m. ET, where he could indicate how worried officials are about the economic outlook.

The decision to stand pat, which was expected, comes as ECB officials size up burgeoning risks in the world economy that range from a volatile currency to rising oil prices to possible trade wars.

Global stock markets slid again this week after long-term U.S. government bond yields touched 3% for the first time in more than four years, a key sign that borrowing costs are rising in the world’s largest economy.

Investors will likely listen closely to Mr. Draghi for signs that the ECB could delay plans to phase out its EUR2.5 trillion bond-buying program, known as quantitative easing, or QE. Analysts expect the ECB to make a decision in June or July to phase out the program by December — four years after the Federal Reserve halted its own QE program.

That timeline could change, however. A raft of recent economic data, from industrial production to retail sales, suggest the eurozone economy slowed in the first quarter of 2020 after outpacing the U.S. economy last year. Meanwhile, inflation in the currency union, at 1.3%, has been persistently weak, and remains far from the ECB’s target of just below 2%.

Earlier Thursday, Sweden’s central bank pushed back a plan to raise interest rates for the first time since 2020, warning that inflation in the largest Nordic economy remains too weak.

Some ECB officials have sought to play down the apparent economic slowdown. German central-bank president Jens Weidmann, a longtime critic of QE, told reporters in Washington last week that Germany’s economy is still booming. Mr. Weidmann argued recently that raising interest rates would give the ECB more room to react to any future economic downturn.

Mr. Draghi is likely to reiterate that the ECB will be patient about phasing out its stimulus policies in light of mounting uncertainties in the global economy. Some economists think the ECB president might even try to guide investors on the timing of a first interest-rate increase, which analysts are penciling in for late next year.

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Europe Markets

European stocks end flat after ECB stands pat on rates

Carla Mozee and

Sara Sjolin

Draghi seen Thursday as boring, but ‘reliable boyfriend’

Bank of England Gov. Mark Carney, left, and European Central Bank President Mario Draghi are each dealing with the fallout from the U.K.’s Brexit vote.

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European stocks finished little-changed as investors shrugged after the European Central Bank kept interest rates unchanged as expected.

Travel shares got hurt by warnings about the toll terrorist attacks are taking on the industry.

The Stoxx Europe 600 SXXP, +1.03% inched lower by less than 0.1% to end at 340.58. The benchmark on Wednesday drove up 1% for its best close since the June 23 Brexit referendum in the U.K. that resulted in the country working toward leaving the European Union.

Investors reacted little to the ECB’s decision to keep its deposit rate at negative 0.4% and its refinancing rate at zero. The bank reiterated that it expects rates to remain at present level or lower for an “extended period” as well as continuing its bund buying program until at least March 2020. ECB chief Mario Draghi’s news conference also didn’t surprise much.

“It wasn’t the most interesting of press conferences from Mario Draghi today, but he played the part of the reliable boyfriend just right, delivering enough soothing tones to keep equities on an even keel,” said Neil Wilson, markets analyst at ETX Capital, in a note.

The euro EURUSD, -0.90% was largely unchanged at $1.1019.

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Travel trouble: Travel shares were a drag on the benchmark Thursday, led by a 6% slide in Deutsche Lufthansa LHA, -0.59% after the German carrier said a series of terrorist attacks have led to a decline in bookings by passengers.

Lufthansa cut its full-year forecast for adjusted earnings before interest and taxes.

Last Thursday, more than 80 people were killed in a terrorist attack on Nice’s beachfront. Also last week, a failed coup attempt in Turkey resulted in the deaths of more than 260 people. An attack at Istanbul’s airport on June 28 left 41 people dead.

Shares of easyJet PLC EZJ, -4.79% fell 5.3% after the airline said currency volatility, “as well as the recent events in Turkey and Nice continue to affect consumer confidence.”

Also trading lower, Ryanair Holdings PLC RY4C, -0.72% fell 5.2%, Air France-KLM SA AF, +2.41% lost 4.1%, and British airlines parent International Consolidated Airlines Group SA IAG, +1.53% ICAGY, +3.41% dropped 3.6%.

Travel service providers TUI AG TUI, -0.99% lost 2%, and Thomas Cook Group PLC UK:TCG shed 2.4%.

Other movers: Italian banks appeared to get a lift from Draghi offering an important endorsement of potential public help for banks saddled with bad loans.

Banco Popolare S.C. IT:BP rose 4%, and Banca Monte dei Paschi di Siena S.p.A. BMPS, +2.24% tacked on 1.8%

Hermes International SCA RMS, +1.75% gained 4.6% as analysts viewed first-half results from the luxury-goods maker positively.

Daimler AG DAI, +3.91% rose 1.3% as the German auto maker posted a 7% rise in net income to €2.4 billion in the second quarter.

ABB Ltd. shares ABB, +3.14% rose 2.2% after the Swedish-Swiss power- and automated-equipment maker posted second-quarter profit of $406 million, above expectations of $393 million.

Indexes: Germany’s DAX 30 DAX, +1.00% closed 0.1% higher at 10,156.21. France’s CAC 40 PX1, +1.38% fell less than 0.1% to 4,376.25, while the FTSE 100 index UKX, +1.53% shed 0.4% to finish at 6,699.89.

Sara Sjolin in London contributed to this report.

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