Brazil Election, ECB Stress Test Results Weigh on Global Risk Assets
Today's financial recap and tomorrow's financial outlook.
The Brazilian Ibovespa (IBOV) fell as much as 8% at the open of trading -- the options market had priced a move in excess of 12% -- but it recovered more than half of those losses by the end of trading. It has fallen 20% from its high less than two months ago as investors repriced their expectations of a contender's victory in the election. Similarly, the Brazilian real fell by 3.35% against the US dollar at the beginning of the session, but retraced about half of those losses by the close.
The results of the ECB's Asset Quality Review (AQR) was disproportionately skewed towards an undercapitalization in Italian banks. Of the 25 banks who failed the stress tests, a third were from Italy. The worst bank of them all was Banca Monte Paschi (BMPS), which may need to raise 2.4 billion Euros of debt or seek a merger. Unsurprisingly, the Italian FTSEMIB was the worst performing European equity index today, dropping 2.24%.
US markets were initially concerned about these major losses at the beginning of trading. The S&P 500 (SPX) made a first hour low, dropping 0.68%. Over the weekend, Goldman Sachs announced in a conference call that it was downgrading its forecast for crude oil in 2014 to $75/barrel for West-Texas intermediate and $80/barrel for Brent. The reasoning for that downgrade was released early in the morning. This prompted a decline in crude prices by as much as 2% and sent shockwaves through global risk assets. They were both able to recover by the close of European trading.
The energy and materials sectors were the worst performers in today's session. Consumer staples and discretionary stocks that will benefit from lower gas prices, continued to lead the sector performance in the major indices.
Pending home sales for September rose a less-than-expected 0.3% from the prior month, up from a 1.0% decline. Economists had expected an increase of 1.0%. From a year ago, sales are up 3.0%.
Tomorrow's Financial Outlook
The week continues with more US economic data tomorrow. September durable goods orders will be reported in the morning, the first time in three months that they will not be influenced by large aircraft orders from the Farnborough airshow. Orders excluding aircraft are expected to rise by 0.5% from an increase of 0.7% in the month prior. Also scheduled for release is the August S&P/Case Shiller home price index and October Conference Board consumer confidence index.
Overnight, there are only a few global reports of note. China will report industrial profits for September and Japanese small business confidence.
It will however be the busiest week for earnings. Fifty-two major US companies are scheduled to report tomorrow. Notables include DuPont (DD), Cummins (CMI), Pfizer (PFE), Arch Coal (ACI), Aetna (AET), Gilead Sciences (GILD), Aflac (AFL), Anadarko Petroleum (APC), US Steel (X), Panera Bread (PNRA), Facebook (FB), Coach (COH), and Freeport-McMoran (FCX).
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