One of the questions of the day is whether or not Europe can bounce back despite the travails of France and Italy. Purchasing managers’ index (PMI) released earlier today provided a measure of relief for investors concerned about the region slipping back into recession. German managers reported a rebound in activity from September’s slump, while the aggregate euro zone reading measured 50.7, besting expectations for a contraction. Composite PMI for the region rose to 52.2, also exceeding forecasts, which predicted a drop. The major dark cloud came from France, where both manufacturing and service activity saw greater declines than forecast, according to the survey-based index. European Union leaders kicked off a two-day meeting this morning to discuss draft budgets. The focus of discussions is likely to be proposals by both France and Italy to budget for deficits beyond EU guidelines in an attempt to kick-start growth. According to a Société Générale research report issued today, “Hopes of the more aggressive policy response at the Council are likely to be disappointed, although European Central Bank president Mario Draghi is likely to urge actions.”
Factory activity in China beats forecasts. October HSBC manufacturing PMI levels for China were released today with the headline measure at 50.4, exceeding consensus forecasts. This mildly expansionary reading suggests that the country is sustaining modest rebound in overall activity, as measured in September.
Unilever struggles in China. According to an announcement today from U.K.-Dutch consumer goods producer Unilever, lower-than-anticipated sales in China brought down the company’s overall earnings. At 2.1 percent, third-quarter sales growth was well short of analysts’ consensus forecasts, despite improvement in North American results.
U.S. weekly jobs data tips toward the downside. There was an uptick in weekly initial jobless claims in the U.S. for the week ending October 18, with 283,000 new claims (seasonally adjusted). With the four-week moving average at the lowest levels since mid-2000, however, positive signals in the labor market are undeniable despite a low participation rate and high level of underemployment.
Tesco issues bleak numbers. U.K. retail giant Tesco reported a massive contraction in first-half results trading today. Profit is down 41 percent to £937 million (about $1.5 billion) and statutory profit before tax down 91.9 percent. Tesco has been under intense pressure since a major accounting revision that resulted in a culling of senior and middle management already. Today’s announcement included the resignation of chair Sir Richard Broadbent.
Earnings reporting season plows on. Caterpillar’s quarterly announcement kicked off a busy days of quarterly earnings reports. The Peoria, Illinois–headquartered machinery manufacturer exceeded analysts’ consensus forecasts and raised the profit outlook for next year, despite slower than ideal global growth. Among the corporations reporting earnings following the U.S. market close this afternoon are oil and gas company Kinder Morgan Management and online retail behemoth Amazon.com .
Portfolio Perspective: Expect Overreactions and Short-Lived Volatility for Now — Adam Grimes, Waverly Advisors
The past few weeks have been challenging to many traders and investors. New volatility has emerged on a level that we have not seen in many asset classes for several years, and stock investors have gotten a not-so-gentle reminder that stocks sometimes do things other than simply go up. Macro news has been evaluated in the worst possible light: fears of slowing growth and looming central bank action, on top of geopolitical conflict and fears of an Ebola pandemic have pushed investor sentiment to swing to extremes. It is thus absolutely critical to avoid emotional mistakes.
We at Waverly Advisors reiterate that behavioral factors are driving the market. Any bounce is this environment is likely to set up a short-term short. Do not buy into strength without confirmation. The bigger picture uptrend remains unchanged.
Adam Grimes is the managing partner and CIO of Pittsford, New York–based research and asset management firm Waverly Advisors.