Thursday, July 28, 2016

FOMC Holds Rates Steady; Details Economic Progress

As expected yesterday, the US Federal Opens Market Committee (FOMC) held interest rates steady with the target range between 0.25% and 0.50%.  One sign of the weakening of the Fed's resolve at maintaining the status quo, however, came with Esther L. George's dissenting vote.  As noted in the formal announcement, the traditionally hawkish George preferred to increase the federal funds rate to 0.50% to 0.75%.  She was outvoted 9-1.

The language and tone of the announcement demonstrated a subtle shift towards a tightening policy, however. Respective to the Fed mandate of maintaining full employment, they said, "Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May."  

Given the very robust jobs report in June, that position is not surprising.  Indeed, the standard unemployment level has been sustained below 5% for several months, although it's equally important to note that over 94 million Americans are now unemployed - the highest number since the Labor Force Participation Rate has been maintained. 

If the job market were the only factor under consideration, there's little doubt that the Fed would be moving to raise interest rates.  The stumbling block continues to be inflation.  The all-items CPI for urban consumers is 1%.  The FOMC target, however, is 2%, and there's little indication that inflation will reach that target in the short term.  They acknowledged that yesterday, saying, "Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further." 

They did not define "medium term" in this context, however Janet Yellen defined it in 2009, saying, "From macroanalysis, I consider short term as referring to less than, say, a year or two, medium term as ranging from around two to six years, and long term as anything beyond around six."  Read into that what you will, since the ultimate question will be whether or not the Fed will raise interest rates before inflation reaches the 2% target.  If that target is not anticipated for at least another two years, then we've a long ways to go before we see any monetary tightening.

The June announcements were rife with caution, citing potentially permanent "headwinds" and some rather dire forecasts regarding the global economy. This month's announcement shows a complete reversal of those ominous undertones.  "Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments."

What they classified as "near-term risks" was not expounded upon, however it's reasonable to assume that they are referencing the unknown impacts of Brexit, a strong US dollar, and the prospect of recession in Europe.  While the Brexit impact is certainly moved out into the distant future - at least 2019 or beyond, even if the UK invokes Article 50 next year - and Europe appears to have inched ever so slightly away from recession, I find it hard to dismiss the impact the strong US dollar is having and will continue to have for the foreseeable future.  It's doubtful, however, that the dollar alone will be enough to stay the Fed's hand.

Interestingly, the markets appeared to treat the FOMC release with a yawn.  The Nasdaq Composite was up both yesterday and today, and the S&P 500, while down a hair yesterday, recovered it today to continue it's horizontal correction without giving or gaining any ground. 

Equally interesting, the Fed Fund Futures still show only an 18% chance of a rate hike in September, and the chance of a December hike dropped to 36.8%.  In fact, you have to go all the way out to June 2017 before the chance of an increase even reaches 40%.  Clearly, the market is factoring in very low interest rates for at least the next year.  The 10-year Treasury Yield is still declining, dropping to 1.52% today, which would be another possible indication that rates will continue low for some time.  (It's also a further indication of a flight to safety, which is a warning of potentially troubled times ahead in the equities markets.)

The Fed summed up a very dovish posture once again, stating, "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."  That view, however, is not consistent with the "dot plot," an estimation of where FOMC members view interest rates over the next several years.  A solid base of participants forecast one additional rate hike in 2016, however the strongest dot concentration shows two rate hikes, presumably in September and December with the average rate falling between 0.75% and 1% by year end.

The next FOMC meeting is September 21st, so we have almost 8-weeks before the next rate decision is expected.  A lot can happen in 8-weeks, and there will be two more major economic data points available to the Fed before that decision is warranted.  What we as traders need to watch, however, is the potential for good economic news to become bad for the market.  A very strong jobs report, or a healthy uptick in inflation could signal that there is a greater potential for a September rate hike.  That would send stocks tumbling once again, hence the good news is bad phenomenon.  Exercise caution around major data releases since the reaction will be somewhat unpredictable for the time being.

With regards to monetary policy, we now turn our attention to the Bank of England and next Thursday's Monetary Policy Committee announcement.  Stay tuned.

Happy Trading.

Tuesday, July 26, 2016

Apple Beats on Earnings and Revenue, But Is It Enough?

Apple (Nasdaq: AAPL) posted their 3rd quarter earnings after the bell this afternoon, and on the surface, at least, the news sounded good.  They beat earnings by $0.04, and they also beat on revenue by $310 million.  In after-hours trading, shares of AAPL surged as high as 8% before settling back to $103.60.  They also held their quarterly dividend steady at $0.57 per share.

The underlying picture, though, is not quite so rosy.  Their sales were down 14.5% year over year, and their gross margin dropped to 38%.  In fact, their forward guidance for the next quarter includes a gross margin range of only 37.5% to 38%, and their forecast for revenue is up slightly from this quarter, but still well below last year.

International sales contributed to 63% of their revenue this quarter, but sales in China were down 33% from last year.  The Apple troubles in China continue, in fact, not only due to the slowing economy in Asia but also resulting from difficulties with Chinese regulators.  The iBooks and iTunes services were shut down by regulators last April, and in June the Chinese government ordered a halt to iPhone 6 sales due to a patent dispute.  (We'll skip the editorial about the hypocrisy of China arguing about a patent infringement.)  The point is, China was once seen as the major growth market for Apple, but at least for now that market has run dry.

The Services business, including iTunes and Apple Pay, were up 19% year over year, however on a quarter-to-quarter basis, it was essentially flat.  Despite Credit Suisse's forecast of the services business providing over 30% of Apple's revenue by 2020, the reality is that the current growth trends are not supporting that prediction.  With Google and Samsung both entering the payment market with comparable products, the competition faced by Apple Pay is becoming formidable. 

Demand for iPhones, iPads, and Macs appears to have peaked.  The iPhone market is already saturated, and the tablet and personal computer markets are crumbling, at least as far as the average consumer is concerned.  The iPad is still doing fairly well in certain business applications, but when it comes to the average consumer, the phablet is rapidly replacing them.  To that end, with the extremely popular Samsung Galaxy S7 and S7 edge out for 6 months, now, the iPhone 7 (with an expected larger screen offering) is a bit late to the dance.

The question that Apple must seriously entertain is whether or not a change at the top is in order.  CEO Tim Cook has yet to prove that he's capable of driving the innovation needed to keep Apple at the top of the industry.  I've seen an increasing number of analysts state that, in their view, Apple's best days are behind them, and thus far I've seen nothing to contradict that opinion.  There has certainly been no innovation coming from the company since the passing of Steve Jobs.  It may well be that the "next new thing" to come out of Apple will be a new CEO.

Monday, July 25, 2016

A Pause in the Rally Across All Capitalizations

For the entire month of July, we've been treated to extremely encouraging news in the face of the first major stock market rally we've experienced in well over a year.  For over a week, both the Dow Jones Industrials and the S&P 500 posted new all-time highs day after day.  Now that we're well into Q2 earnings season, however, the markets have turned flat and the exuberance is starting to subside.  Let's take a look at the anatomy of the rally separated by large-cap, mid-cap, and small-cap stocks.

Daily Chart of Small, Mid, Large Cap Indexes for July, 2016
These three charts show the month of July in the S&P 600 Small Cap Index ($SML), the S&P 400 Mid Cap Index ($MID), and the S&P 500 Large Cap Index ($SPX).  For those not familiar with the capitalizations, a Small Cap stock is considered one with under $2 Billion in market capitalization, a Mid Cap stock has between $2 Billion and $10 Billion in market capitalization, and a Large Cap stock has over $10 Billion in market capitalization.

At first glance, it appears that all three indexes benefited from the rally.  Each of them started their rally immediately following the Brexit sell-off in late June, and each of them have plateaued over the last two weeks.

From an Elliott Wave perspective, we have completed three very obvious waves in all three indexes.  Wave 1 lasted 4 days in each, Wave 2 lasted 2 days, and Wave 3 lasted 4 days in $SML, 5 days in $MID, and 6 days in $SPX.  From that point to the present, each index has traded flat.

Of the three indexes, though, in only $SML was Wave 3 longer than Wave 1.  Under Elliott Wave theory, we know that Wave 3 cannot be the shortest of the impulse waves.  This means that, assuming this is a true 5-wave impulse sequence, only the Small Cap stocks remain unconstrained to the upside.  Both the Mid Caps and Large Caps, however, are faced with a ceiling, which is the actual height of Wave 3 beginning at the bottom of Wave 4 when that wave completes.  As it stands now, the Large Caps have an upward limit of around 2250 and the Mid Caps around 1615.  We'll need to keep these potential limits in mind once the uptrend resumes and we plan exit strategies for long positions.

All this, of course, assumes that we are in a 5-wave impulse, and not a continuation of the correction that's been ongoing for over a year.  So far, the pattern has not violated any impulse rules.  In fact, it's conforming to them rather nicely.  Wave 2 retraced between 38.2% and 50% of Wave 1 in all 3 indexes, Wave 4 has not (yet) violated the territory of Wave 1, and we're experiencing well-defined alternation between Waves 2 and 4.  As long as Wave 5 doesn't exceed the length of Wave 3 in the Mid and Large Caps, the impulse pattern will be valid.

The caveat, of course, is that we're in the middle of earnings season, and anything can happen here.  We also have a presidential election coming up, and that should add a bit of volatility into the mix as the summer draws to a close.  What could easily invalidate the entire impulse pattern would be a price decline that creates overlap with prior waves, signalling a consolidation pattern, not an impulse pattern.  I would be very concerned if we dropped below the high set on June 8, causing overlap with the prior A-B-C corrective wave pattern, and I would consider the impulse pattern definitively invalidated if we drop below the high set on June 23, just prior to the Brexit vote.  Some purists may argue that the pattern's valid unless we dip into the Wave 1 high in the current sequence, however when analyzing Elliott Waves I find it important to consider the pattern or patterns that completed as we enter the current one.  Continuation patterns can be confusing since they can take so many different forms, and for those of us that change strategies based on whether or not a market is trending, knowing where we are in the cycle is extremely important.

As to the current situation, we have clearly been in a flat corrective pattern for the last two weeks, and the most obvious wave count structure would place this corrective pattern in Wave 4.  Take a look at it yourself, and plan your strategies accordingly.  Remember to include the weekly and hourly charts in your analysis if you're a short-term trader using the daily chart for your primary analysis.

Happy Trading.

Sunday, July 24, 2016

GE Offers Promising Outlook for Aviation

General Electric (NYSE:GE) released earnings on Friday, beating EPS forecasts by $0.05 and revenue by $1.74 Billion.  That didn't prevent their stock from taking a 1.8% hit pre-market, however, due primarily to a 2% decline in orders and what they described as a "volatile and slow-growth economy."

The news, however, appears rather bright for the Aviation industries.  GE reported a strong first half of the year in that industry, and is forecasting the remainder of 2016 to remain strong as well.  There were a couple of items that bode well for the airlines, at least according to GE.  They saw commercial traffic growth of over 6% this year, down a bit from last year, but still experiencing a healthy growth pattern.  Additionally, the airplane load factor remains at 80% for the second year in a row, and GE reports over 2 million departures added in the past year.

GE reports, not surprisingly, that jet fuel continues to be deflationary, and is down over 50% over a three-year period.  When you combine the lower fuel costs, increased passenger demand, and a very strong load factor, it's reasonable to expect a healthy year for what has been an oddly depressed airline industry that has been in an Elliott Wave zig-zag and flat pair of corrective patterns for the past 18-months.  (Do keep in mind the Schlumberger warnings of an impending oil supply deficit, however.  If that manifests, it will put an end to depressed jet fuel costs.)

You can see the overall pattern for the airline index in this weekly chart:

Airline Index Weekly Chart
We can see on the chart that the index started a steep uptrend in October, 2011.  It then traced out a very distinctive 5-wave impulse pattern that completed in January, 2015.  Since then, however, it completed a classic A-B-C Zig-Zag pattern, retracing almost 50% of the prior impulse pattern, and it looks like it's starting a possible flat correction now.  This overall pattern appears to be Wave 2 of a larger overall 5-wave Impulse, so once this corrective pattern completes, we can look forward to a very healthy third wave impulse.  Long-term traders should enjoy a very nice 3 or 4 year bull trend in airlines once that wave kicks off.  The way this pattern is trending, though, that may not happen until 2017.

Returning to GE, there were some additional interesting comments related to defense spending.  They forecast it to be flat in 2017 here in the US.  Given the number of industries here dependent upon defense spending, that's a cautionary note that we'll have to carefully watch.  Now, this flat projection may well be due to the number of sizeable contracts that were awarded in 2015 and early '16, so a pause in new contracts is to be expected, but it will be important to watch other companies in the industry to see how this matches their own forecasts and revenue plans.

Interestingly, GE forecasts international defense spending to be up 4% globally (excluding the US.)  That comes at a time when Europe is teetering on recession and facing the unknown threat of Brexit, so that 4% value is likely depressed due to the state of the global economy.  Should the economy heat up, it's reasonable to expect a similar increase in global defense spending, especially at a time when the terror threat appears to be spreading to parts of Western Europe.

With US defense spending flat but international defense spending up, we'll need to watch for companies that have a strong global stake.  These would include Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), and Raytheon (NYSE:RTN).  Fire Support, a defense marketing website includes an excellent list of the top 100 global defense companies for 2015.  While the list is a year old, the major players in this space have not changed.  If you're looking for companies that will benefit from growth in international defense spending, this is an excellent place to start.

From a trading perspective, it looks like there will be some short-term potential plays in the airlines, but be aware that there should be at least one more downward wave in the correction.  Longer term players can look forward to growth of a bit over 200% in the airline index from 2017 to 2021 if the Elliott Wave pattern holds true. For defense contractors, look more for trades in companies servicing overseas orders.  Just be aware of the impact the strong US dollar will have on their exchange rate and earnings forecasts. 

Happy Trading.

Saturday, July 23, 2016

Trading Outlook for the Week of July 25-29

We close out the month of July in the coming week, following four solid weeks of strong performance.  The week ahead sees the July FOMC meeting, the GDP report, and another week of key earnings reports.

We're starting to see a bit of a pause in the upward movement across all capitalizations, and from an Elliott Wave perspective, all but the Nasdaq Composite appear to be in a fourth-wave consolidation.  The strongest plays for the week appear to be in either the Nasdaq or in the Large Cap stocks.  Both Mid and Small Cap stocks remained in a horizontal consolidation pattern, so we'll avoid those until their trends resume.

The three strongest sectors closing out the week are Technology, Utilities, and Health Care, so for long trades we'll be looking primarily in those sectors.  That the Utilities sector surged on Thursday and Friday is an area of concern since that indicates a renewed flight to safety.  The 10-Year Treasury Yield declined 1.87% this week after a large spike up last week.  We'll keep an eye on this throughout the week as well, since a decline in yield will further support the concept of a flight to safety.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - No Trades
Small Caps - No Trades
Nasdaq - Long


Showing strength
XLK - Technology

XLU - Utilities
XLV - Health Care

Showing weakness
XLB - Materials
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples

XLF - FinancialsXLY - Consumer Discretionary

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/25/16
  • 10:30 - Dallas Fed Manufacturing Survey
Tuesday, 7/26/16
  • 09:00 - S&P Case-Shiller HPI
  • 10:00 - New Home Sales
  • 10:00 - Consumer Confidence
Wednesday, 7/27/16
  • 08:30 - Durable Goods Orders
  • 10:00 - Pending Home Sales Index
  • 10:30 - EIA Petroleum Status Report
  • 14:00 - FOMC Meeting Announcement
Thursday, 7/28/16
  • 08:30 - International Trade in Goods
  • 08:30 - Jobless Claims
Friday, 7/29/16
  • 08:30 - GDP
  • 08:30 - Employment Cost Index
  • 09:45 - Chicago PMI
  • 10:00 - Consumer Sentiment
Earnings Reports Watched for Sector or Market Significance

Tuesday, 7/26/16
  • Before Market Open - Caterpillar (NYSE:CAT)
  • Before Market Open - 3M (NYSE:MMM)
  • Before Market Open - United Technologies (NYSE:UTX)
Wednesday, 7/27/16
  •  Before Market Open - Boeing (NYSE:BA)
Thursday, 7/28/16
  •  Before Market Open - Ford (NYSE:F)
Friday, 7/29/16
  • Before Market Open - UPS (NYSE:UPS)

Our long positions this week will be limited to large caps and Nasdaq stocks, primarily in Technology, Utilities, and Health Care.  We'll keep our stops very close for several reasons:
  • Both UNP and SLB provided strong evidence of potential problems in several key industries.  This may take the wind out of the strong bullish sails we've experienced for four weeks.
  • Strength in the Utilities sector and a slight decline in the 10-year yield are showing signs of a renewed flight to safety.
  • There are major companies reporting earnings throughout the week.  This will add a measure of unpredictability to the markets.
  • FOMC reports on Wednesday.  While we don't anticipate any major announcements, just the tone and language of the announcement can generate unforeseen shifts in market behavior.
  • Mid-caps and Small-caps are experiencing consolidation, and both Large-caps and Nasdaq are showing signs that they, too, will enter a similar phase.
As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Friday, July 22, 2016

Schlumberger Warns of Impending Severe Oil Supply Deficit

Schlumberger (NYSE:SLB) announced earnings after the bell yesterday, beating EPS estimates by $0.02 and revenue by $70 million.  That's the good news.  Everything else about the release points to a serious energy crisis looming in the not-too-distant future. 

Demand in the oil industry continues to grow at a steady and aggressive pace.  As the economies in the US, Europe, and China recover, that demand will increase.  The supply side, however, has taken a horrendous hit over the past two years.  CEO Paal Kibsgaard summed it up, "We are heading towards a significant global supply deficit as the E&P [exploration and production] spend rate now is down by more than 50%."

There has been a significant cost efficiency problem within the industry for some time, and that inefficiency in cash flow has been exacerbated by the dramatic plunge in oil prices worldwide over the past seven quarters.  Rig operators have reacted to this price crisis with a massive reduction in oil field activity.  Active rigs are now down to 25% of their original level, and the appetite to start new wells has reached a critical low.  This has caused a ripple effect through the entire oil supply-chain industry, and it's about to reach critical mass.

Non-OPEC production is set to drop an additional 900,000 barrels per day.  Similar weakness is being forecast in the non-Gulf OPEC nations, and as short-term high production activities run their course, the expectation is for an accelerated decline in overall oil production worldwide.

Kibsgaard went on to say, "The market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory."

Cash flow from the rig operators is becoming strained, and they are delaying payments to creditors in an attempt to improve that flow.  This, too, has a ripple effect through the supply-chain industry.  What the entire environment demonstrates, though, is that as the service industry pricing inevitably improves - supply and demand will naturally force it - much of the capital that would normally be spent on exploration and production will instead be spent on debt reduction.  That will put added pressure on the oil supply deficit, extending the duration of the pending crisis.

What all this means is that there will be continued negative pressure on the various industries that support all aspects of the oil business.  Expect the metals industries to take a hit as both repairs to existing rigs and the development of new rigs are put on hold or canceled outright.  Expect shipping to take a hit as the flow of supplies, raw materials, and energy resources to and from suppliers and operators continues to decline.  Expect the chemicals industries to take a hit as there is less demand for the materials that are used in drilling and refining.

This is not good news for the consumer, either.  We currently still have an oil glut, which, coupled with an uncharacteristically strong US dollar,  is holding prices down for the moment.  As that glut transitions to a supply shortfall over the coming year, however, we can anticipate a rapid rise in oil prices world-wide.  That will dramatically impact the price at the pump, likely forcing gas prices to record highs around the world. 

It will take some time for all of this to play out, but it does appear that the piper that played the tune of ridiculously low oil prices is poised to deliver the bill.  Paying that bill will be painful at best. 

Happy Trading.

UNP Reports Negative Economic Impact Due to Low Oil Prices and Strong US Dollar

One of the companies we closely follow for their insight into the overall health of several sectors is Union Pacific Corporation (NYSE:UNP), headquartered in Omaha, Nebraska.  As one of the larger transportation companies in the US, their revenue is directly dependent up the health of other industries, and they provide extensive candid detail into each of those areas in their quarterly earnings calls. 

UNP reported earnings before the open on July 21, and their ensuing earnings call painted a less than optimistic picture of the overall health in a variety of sectors.  There are two driving factors associated with declines and pressures they are reporting: low oil prices and the strong US dollar.  Said CEO Lance Fritz, "A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year."

For UNP, the only area of growth experienced this year was in Agriculture shipments (up 2%), however that growth was primarily driven by severe harvest delays in South America and by a high demand for corn in Mexico.  Had South America not experienced agriculture problems, even grain shipments would have been down for the year.

The remaining segments were all doom and gloom.
  • Total volume was down 11%.
  • Carload volume declined by double digits in coal, intermodal, and industrial products.  (Intermodal refers to shipments of the large containers typically carried by rail but then transferred to ship or truck.)
  • Automotive was down with finished vehicle shipments declining 10%.
The strong US dollar continued to hurt exports with chemicals, plastics, and fertilizer all down for the year.  With inflation at or near zero in Europe and with the US likely to raise interest rates either at the end of 2016 and most certainly several times in 2017 and 2018, there is little likelihood of any weakening of the dollar for the foreseeable future.

Low oil prices continue to have a significant negative impact.  Rail shipments in that industry were down 23% due to low natural gas prices coupled with high inventory levels.  Lower international coal prices (due to the strong dollar) also contributed to that decline.

The other impact low oil prices continues to have is in the chemical and metals industries.  Mineral volume declined 32% and Frac Sand declined 43%.  Metal (aluminum, steel, etc.) declined 11% due to reduced shale drilling.  Expect to see this ripple through other industries as earnings continue to report through the quarter.

The flooding in Texas had a severe impact on construction shipments, down 4%.  Intermodal shipments (also impacted by that flooding) were down 16%.  We can expect to see that ripple through the trucking and shipping industries as well. 

The forecast for the remainder of the year was not very encouraging, either.  UNP forecasts agriculture to remain strong since there are expectations for a strong US crop harvest and there is continued weakness in South America.  Automotive shipments should also see a boost as the 2017 models come out, and the industry is currently trending well below the projected 17.5 million vehicles for the year.  There are also expectations of a boost in construction and in the housing market as the year progresses. The rest of the industries, however, are still expected to experience headwinds.
  • UNP still expects the pressures due to low oil prices and low natural gas prices to continue. 
  •  They expect drilling to continue to decline, and with it the demand for metals and chemicals will also decline.
  • Intermodal shipment is also expected to experience pressure due to the impact the strong dollar is having on US exports.
  • The economy in Europe and China remains weak, adding to global pressures on prices and demand for goods.
This is the first major earnings transcript we've seen this quarter that paints such a gloomy picture of the first half of 2016, however UNP is typically right on the mark in their assessment.  Consider the impacts they are citing in related industries when reading their report, since the effects will be readily apparent as other prominent names report earnings over the next two quarters.

Happy Trading

Thursday, July 21, 2016

ECB Holds Rates Steady; Leaves Door Open for Stimulus Later This Year

The European Central Bank announced this morning that they were holding rates steady, meeting market and analyst expectations for their July meeting.  The main refinancing rate remains at 0%, the deposit rate is steady at minus 0.4%, the marginal lending facility rate at 0.25% and the ECB held their Quantitative Easing position at a monthly €80 Billion.  None of this came as a surprise to world markets which have thus far stabilized since the surprising Brexit vote in June.

Caution was the order of the day as the Central Bank adopted a "wait and see" attitude, postponing any decisions until their September 8th meeting.  There's growing speculation that an increase in Quantitative Easing could be announced then, however in his post-announcement speech Mario Draghi stated, "We confirm that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim." 

Haven't we heard that before?  It sounds very similar to the tune sung by the US Federal Open Markets Committee throughout the final year of QE3 here in the States. Essentially, yes they have an end-date, yes there's a fixed amount planned into the process, but oh by the way, that end date will ultimately be data dependent based upon the prospects for normalized inflation, defined both in Europe and in the US as 2%.  With the current rate of inflation in the Eurozone sitting at 0.1% following a year of deflation, that March 2017 target looks like a pipe-dream.

Draghi briefly addressed Brexit in his speech, saying "All we can say is that it is a risk that has materialized and it is a downside risk." This, too, is inline with the wait-and-see attitude that permeated the speech, and it's consistent with the approach being taken in the UK and US.  With the pending start of UK separation delayed until some time in 2017, fears of immediate turmoil have abated and none of the Central Banks are eager to take any action that might upset the tentative stability world economies have experienced over the last 3 weeks.  The word from all of them is that additional data is needed before any action (if action is warranted) can be considered.

With no major policy changes coming out of the ECB this month, the focus will now shift to Janet Yellen and the FOMC announcement on July 27th.  As with the ECB, no policy changes are anticipated in the US either, although the robust reaction of the stock market this month, combined with good corporate earnings and relatively good economic data have analysts anticipating a softening of the extreme dovish tone in their guidance on interest rates.  At this point, the market has factored in a 19.5% probability of a rate hike on September 21, up from 12% a week ago.  A December 14th rate hike probability has jumped to 40%, up from 30% last week.  It will be interesting to check these numbers following Yellen's announcement next week.

For now, it looks like the remainder of the summer will be uneventful from a Central Bank perspective.  That leaves only earnings and economic data to drive the markets, and both have been trending positive for much of July.

Happy Trading.