Yesterday's selloff in U.S. equity markets was more a function of Mario Draghi and the ECB delivering on weaker than expected quantitative stimulus policies than anything else. In recent weeks we have seen U.S. equity markets oscillate between modest gains and uneven losses as a result of weak commodity prices, concern over global demand/growth, fear of hitting a domestic economic soft patch, fear of a relapse in Asian markets, questions concerning earnings and on and on. None of those factors were at play in yesterday's selloff. Rather, markets seemed consumed with Europe.
Europe's woes were felt globally. It was not a good day for investors - unless those investors had been waiting for a market pullback in order to put some capital to work - which I suspect some smart asset managers did.
The European economy remains seriously impaired by a long list of economic and political dysfunction. The unemployment rate in the EU for example is greater than double that of the United States. Additionally, in peripheral economies it is far worse. In many respects it is reminiscent of the economic challenges we were faced with as a nation during the Great Depression of the thirties. In Spain, Italy, Portugal and Greece the official unemployment rate for adult males aged 21 - 35 is close to 35% on average. That unfortunately is not the least of Europe's concerns. Consumer demand has flat lined, industrial production has as well. The National governments are a fiscal mess and interest rates are negative in several key markets.
Investors were expecting a bold monetary move by the ECB to stimulate the EU economy, but from the likes of investor reactions, the ECB's policy announcement left investors terribly unimpressed. At least in part, the disappointment felt by investors was fueled by expectations that Mario Draghi himself had gone out of his way build over the past six weeks since the last ECB monetary policy meeting. We have heard Mario Draghi stating that the ECB would do whatever is necessary to restore economic growth to the union. Yesterday's monetary policy announcement was a "fail" from several vantage points against that bold statement as a back drop. The ECB pushed back the earliest possible end date for current monetary stimulus policy by six months; which appears more academic at this state of the cycle than anything else. The ECB did not change its key lending rate but lowered the rate paid to banks on overnight assets to 0.3% which only further undermines the potential profitability of financial institutions. Finally, the $393 billion commitment to stimulus appears far short of investor expectations. The pain in European equity markets was evident as they all registered their worst one-day performance since the global correction in August.
STOXX 600 - 3.61%
FTSE 100 - 2.27%
DAX - 3.58%
CAC 40 - 3.58%
IBEX 35 - 2.42%
At the end of the day, I am not alone in believing that the ECB will in fact do whatever is necessary to return the EU economy to health. Yesterday's announcement was interpreted as meaning that it may well take longer than many investors with European exposure were expecting. The delay represented by the ECB's monetary announcement triggered institutional selling on a massive scale with a focus on Financials. The selloff quickly migrated from the European bourses to the U.S. equity markets in late morning trading.
All three majors lost meaningful ground on mixed volume. The S&P 500 (-1.43%), Dow Jones Industrials (-1.41%) sliced through their respective 200 DMAs but closed above their 50 DMAs which in both cases remain inverted and below the longer term measure. The NASDAQ (-1.66%) however managed to close above both its 200 DMA and 50 DMA despite suffering the worst performance of the day. Volume on the NYSE (+8.52%) rose while volume on the NASDAQ (-1.12%) contracted modestly. Financials (-2.13%) were the worst performing sector on the day followed by Health Care (-1.88%) and Consumer Discretionary (1.80%). All other sectors lost ground save one, Consumer Staples (+0.19%).
In a matter of two short trading sessions, the Dow Industrials have surrendered 410 points. As an investor you must ask yourself if there is more to this move? Are we setting up for a year-end selloff as opposed to a Santa Claus rally? It is important to take several considerations into mind.
Firstly, Chair Yellen has been decidedly upbeat in her and the Federal Reserve's assessment of the U.S. economy in recent weeks. So much so that investors are cautiously expecting a move towards normalization in the Fed's December meeting. That positive tone has been validated by steady employment gains, hints of inflation in several recent key data releases and continued economic expansion here at home.
Secondly, crude oil rallied sharply from Wednesday's $39.94/bbl to 41.10/bbl yesterday on the news that OPEC has committed to stabilizing production and global pricing. Firmer crude prices will go a long way to remove a factor that has plagued equity pricing, not only in recent weeks, but for the better part of the past 18 months. As I have indicated this week, a coordinated move by the Saudis would likely be the only factor that had the potential of stemming crude's selloff.
Thirdly, and somewhat perversely, the euro rallied 3.07 cents versus the U.S. dollar yesterday in one of its strongest one-day rallies in years as a result of the markets reaction to the ECB's monetary policy announcement. That rally illustrates two things; the euro is no longer a one-way trade and in that event, the euro's unpredictably positive price action versus the U.S. dollar will actually make a move on rates by the Federal Reserve a bit easier - if it does materialize.