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China Stimulus and Rising Confidence Boost US Stock Markets

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Today's financial recap and tomorrow's financial outlook.

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Chinese markets reversed higher last night after five days of losses. A mixture of new financing from the People's Bank of China (PBoC) and a proposal of new free trade zones boosted Chinese equities. The Shanghai Composite (SHCOMP) rose 2.07% and the Hang Seng Index (HSI) gained 1.63% - it is a rare occurrence to see both post such strong gains in the same day. The US-denominated MSCI-China A-shares ETF (FXI) posted its largest gain since March 21, the day that started the most recent bull leg, gaining 3.07%.

Separately, the Swedish Riksbank cut its main policy rate to zero from 0.25%, economists had expected a cut of 12.5bps, and also lowered the path of future rate policy substantially. The central bank noted high levels of consumer indebtedness and still low levels of inflation as the reasons for the surprise cut. They also did not rule out currency intervention with the Krona and non-standard measures (likely asset purchases).

US markets took the cue from the strength in Asian markets overnight to open the morning higher, despite weaker economic data. The S&P 500 (SPX) opened up 0.47% and grinded steadily higher throughout the rest of the session. Small cap stocks were the real standouts today, the Russell 2000 (RUT) closed up 2.85%. Energy and industrials stocks were the real stand outs, propelled by the expectation for higher inflation in the future due to the substantial drop in gas prices over the past four months. The SPX is currently positive for the month of October after being down as much as 8% at one point.

The Conference Board's October consumer confidence index was one of the contributors to this gain. Lower income households saw an enormous jump in confidence over the last four months as gas prices have fallen. This boosted the overall index up to 94.5, better than the 87.0 expected, and the highest reading since October 2007. On the other hand, September durable goods orders showed the exact opposite optimism. Orders fell 1.3% from the prior month, worse than the +0.5% expected, and capital goods orders (a forward looking indicator) showed the second largest drop of the year - the other was in January.

Facebook (FB) earnings reported after the close were inline with estimates, but not enough to move the needle on the stock price. Advertising revenues grew by 11%, mobile ad revenue by 66% (compared to 64% expected), and total revenues came in at $2.96 billion versus $2.95 billion expected. The stock was mildly down in the after hours. The options market was priced for a move of 7.86%

Tomorrow's Financial Outlook

Tomorrow is the Fed decision. The statement will be released at 2:00pm ET, there is no press conference or economic projections. The hint of action - possibly the end of QE - two weeks ago from St. Louis Fed President Jim Bullard helped arrest the decline in risk assets. It is likely that the Fed reduces its asset purchases to zero, but in order to keep up the optimism in the market, it will have to act dovishly and acknowledge the poor economic data in the third quarter, and the negative effect of the rising US dollar.

Preliminary Japanese industrial production for September is due out overnight. Retail sales announced today showed a very strong, larger-than-expected gain for September. Chinese consumer sentiment and UK mortgage applications are also scheduled to be released.

Fifty nine major US companies are scheduled to report earnings tomorrow. Notables include Hess (HES), Ally Financial (ALLY), Ralph Lauren (RL), Kraft Foods (KRFT), Avis Budget (CAR), Metlife (MET), Visa (V), and Carlyle Group (CG).

Twitter: @Minyanville

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No positions in stocks mentioned.

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