Good morning. As we begin the fourth quarter--traditionally the strongest--there are two topics on trading desks: 1) earnings season, and 2) to what extent the U.S. slowdown will spread to the global economy.
1) Earnings season:
Over the last decade, traders have noted that financial stocks in the S&P 500 represented about 18% of the index market cap but represented 26% of overall earnings. They are therefore the key, and watching the news today out of UBS (which said it would have $3.4 b in losses, cut jobs and removed some senior managers) and Citigroup (saying profits will drop 60% due to losses in subprime and LBO markets), the pattern for financials this quarter is now clear: banks and brokers will take big writedowns--erring on the side of caution--this quarter and next so they can begin 2008 with a clean slate.
Citi down 2% pre-open, but UBS up fractionally—the question now is, given the dismal performances of the banks last quarter (Citi was down 9%), is most of this news already in the stocks?
2) U.S. and global growth:
It is not at all clear that the old saying "when the U.S. sneezes, the rest of the world catches a cold" applies anymore; it certainly does not apply to the extent it did so even a decade ago.
Consider this: according to the Economist, this year for first time China alone will account for more of global GDP growth than the US at current exchange rates. China and most other Asian emerging economies are now exporting more to the European Union than to the U.S.
David Kotok has also written often about this "decoupling" of the U.S. and global economies. It is a different world today. For example, Kotok notes that:
--Today, Asian and other emerging countries all have large currency reserves, providing insulation in a downturn.
--China has become Japan's largest trading partner. The U.S. is now second.
--In North America, Canada has distinct energy pieces that are growth oriented.
--Old Europe has central and emerging Europe as its growth engine.
--Latin America, particularly Mexico and Brazil, do remain vulnerable to a U.S. slowdown.
This is the reason the global stock markets continue to perform well--it's not that the U.S. doesn't matter, it's just that there are other growth engines emerging in China and Central and Eastern Europe that are helping to take up the slack. For Asia in total, for example, a 1% drop in the US growth rate translates to only about a 3/10 of 1% drop in the region's GDP growth.
Meanwhile, the shorts in the U.S. stock market continue to cover their positions. Friday's CFTC data for the week ended Tuesday showed big drops in net short positions in the S&P futures contracts. More evidence that the Fed rate cut is having an effect on the stock market.
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