An emerging calm

Equity markets regained their poise on Tuesday after five days of losses. The FTSE 100 celebrated the Office of National Statistics report that the UK economy grew, in 2013, at its fastest rate since 2007. The Vix having briefly touched 20 on Monday evening, traded back down to 16, as investor nerves appeared to be calming down. In my view, the fact that markets have settled down in the past 24 hours, encouraged by the emerging economies addressing the recent issues, this must raise the chances the Fed will look to taper by another $10bn tomorrow evening. 

Looking at which sectors have been hit hardest over the past few days, surprisingly it has been the more defensive sectors of tobacco, food and beverage, and telecoms. Telecoms sector performance would have been impacted by Vodafone on Monday. In contrast on Tuesday, the sectors leading the recovery were the higher beta ones, mining, industrials and autos.

The US earnings season is now about a quarter of the way through, and of the 153 S&P 500 companies that have reported so far 69.3% have reported earnings above Wall Street estimates. A slightly smaller percentage has posted revenue numbers that topped estimates, according to a Reuters report. So far this earnings season appears to be in line with previous quarters.

It is easy to forget, whilst focussing on emerging market concerns and what the Fed might do next, that ultimately company profits are very important to ensure the market remains underpinned. What continues to accompany many earnings reports is the commitment by corporates to return cash via dividends or share buy-backs to the shareholders. According to a recent report in the Financial Times about one-third of the world's biggest non-financial companies are sitting on a $2.8tn gross cash pile. One would hope this should provide another underlying support to the equity market.

Ahead of tomorrow's decision by the Fed, the macro news in the US was mixed. Durable goods orders were weaker for December than expected but consumer confidence beat expectations. I think most commentators expect the Fed to taper tomorrow; the surprise will now probably be if they decide to wait. As always I will be watching the reaction of the bond market to any changes to the Fed's monetary policy. The reaction many would not expect was for the recent fall in yields to continue on a further reduction.

Posted on January 29, 2014 .