Treasury markets were higher and equity markets in the US were lower to end the week, showing another “largest drop since June” scenario. Most of the activity was driven by results in corporate earnings coming from a wide variety of companies (General Electric, McDonald’s and Microsoft were some key examples). The results were largely disappointing and this along with a Eurozone summit meeting that failed to discuss additional aid measures for Spain weighed on sentiment for most of the week.
The declines in sentiment brought selling pressure to oil and the metals group as well, but the main headlines was the 1.7% drop in the S&P 500, which was worse than last week’s performance and created the largest losses we have seen since the beginning of the summer. These losses were even more substantial than what was seen in Europe, where the Euro Stoxx 600 saw declines of 0.8%. As is generally the case, the Euro (along with the high yielding currencies) fell against the US Dollar as investors took a more defensive stance against uncertain market conditions.
Commodities Take a Hit on Decreased Demand Expectations
Some of the largest losses on the week could be seen in commodities, as oil and copper lost more than 2% each as investors started pricing in decreased demand expectations after the weaker corporate earnings results posted during the week.
We did see something of an ominous anniversary in equity markets, as the worst one-day market crash in US history was seen 25 years ago (when the Dow Jones Industrials dropped by 23% in one day). And while sentiment was nowhere near the same levels seen then, the trend was still downward, as roughly 50% of the 18 companies that released earnings results for the third quarter disappointed analyst expectations.
In addition to this, marcro economic data showed that sales of previously owned homes in the US also saw declines and foreign direct investment (FDI) into China was also lower than analysts had originally expected. All of these factors in combination are making it difficult for investors to commit to long positions into an unpredictable weekend. The moves seen at the end of the week reversed the 2.3% rally that was seen during the previous three sessions (which was the biggest gain in the S&P 500 seen this month). Looking ahead, expect this weakness to continue at least into the Asian session as trading begins on Monday.
Oil Prices continue to show sustained weakness after failing twice at the 100 day EMA. In terms of historical support, the next level to watch can be found at 87.60 and just south of there we will have some critical Fibonacci levels coming into play at 86.10. So this cluster of support can be used to take short term buys but keep stops tight because any breaks below here will likely send prices much lower into the mid 77s. Most of the momentum is to the downside at this stage, so any rallies should be viewed as selling opportunities.