The nuance in our view is that we thought the earnings results and guidance would stir things up. They have to a certain extent since they have not provided a clear line of sight to strong growth ahead. Yesterday, though, the earnings news was overshadowed by worries pertaining to China that rocked the emerging markets and their currencies, and triggered a safety trade in US Treasuries, a fallout in the yen-based carry trade, and broad-based selling in the stock market.
There hasn't been much letup this morning as each of those trades remains intact. Emerging market currencies are weak, Treasuries continue to press higher, the yen is gaining strength, and the S&P futures are down 9 points.
It is going to be a negative start for the cash market, notwithstanding better-than-expected earnings results from Microsoft (MSFT), Procter & Gamble (PG), Honeywell (HON), Starbucks (SBUX), KLA-Tencor (KLAC), Kimberly-Clark (KMB), Bristol-Myers (BMY), and Juniper Networks (JNPR).
One of the glaring ironies today is that many narratives point to China as the source of the problems for global equity markets, and yet China's stock market was down less than many other markets on Thursday and was up 0.6% today.
Japan's Nikkei dropped 1.9%. Major European bourses, meanwhile, are all underwater at this point with many registering losses of at least 1.0%.
The stock market might have a problem on its hands and the problem is that it isn't exactly sure what the problem is.
Are stocks trading lower on the belief there is going to be a currency crisis? Are they trading lower because the earnings guidance hasn't been as upbeat as expected? Are they trading lower on concern about further Fed tapering? Are they trading lower simply because the market is overdue for a correction?
All of the above may very well apply, but there is only one, clear answer. Uncertainty has gripped the market, and when uncertainty does that, there is a tendency to sell first and ask questions later, particularly when the market is coming off a quarter in which it gained 10%.
We can't put our finger on why the stock market is specifically acting the way it is. Currency moves appear to be a leading candidate. They drive traders to reduce leverage and they weigh on the psychology of investors who have seen bad endings on that front before.
In an environment like this, it reasonable to expect increased volatility, because the echo chamber is filling with a lot of noise as to why capital markets are behaving the way they are.
--Patrick J. O'Hare, Briefing.com