Equities investors are becoming hard to satisfy

27 October, 2016

Uninspiring earnings projections from giant U.S. companies are weighing on Asian equities this morning after Wall Street stocks fell for a second day. When looking at the bigger picture, earning season wasn’t really disappointing so far with more than 75% of companies beating bottom line forecasts that would likely lead to profit growth for the first time in five quarters. However, investors need to see more solid growth in order to justify the overstretched valuations of their equity holdings. 

Another factor weighing on Asian equities today was the drop in Chinese industrial profits growth which grew 7.7% YoY in September from 19.5% in August, suggesting that policy makers will face more challenges to keep growing the economy at the desired pace. 

The investment environment is becoming more challenging nowadays especially with the drop in equities coinciding with higher yields on bonds leaving traditional investors with little options to diversify their portfolios. With more uncertainty ahead whether its U.S. elections, Fed raising rates, hard Brexit negotiations, and limited tools from major central banks, I continue to see alternatives such as gold are a must have as an insurance policy.

U.S. crude inventories vs OPEC

Oil bulls received a pleasant surprise yesterday after inventories unexpectedly fell 553,000 barrel in the week to October 21. The EIA data which has become somehow the nonfarm payrolls of energy markets sent U.S. oil from a 2% loss to green territory for a short timeframe before falling back 1.6%. Oil traders have been clearly ignoring fundamental factors most recently and driven mainly by comments from OPEC members and this will remain the case until November 30. We expect prices to remain volatile but within tight ranges for the next couple of weeks, so a sideways trading strategy could work in this situation.

UK not in a recession

UK’s third quarter GDP later today will show how the economy fared in the immediate aftermath of the Brexit vote. Although the data will likely show that growth slowed from the previous quarter it’s still not as gloomy as many had predicted earlier. If the figure managed to beat the 0.3% expected growth, this will end speculations on further easing in monetary policy and provide some short term relief for the pound.

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