Will Caterpillar signal a changing of the guard?

After a rally on Wednesday momentum for stock markets once again turned negative In Europe during the day on Thursday, as the path of least resistance still appeared to be down. Commentators on CNBC expressing their belief that markets are taking their lead from the most negative headlines.

 

Caterpillar, a market leader in mining and construction equipment, announced on Thursday 5000 job cuts. The cuts are made in response to cutting revenue guidance for the 4th year running. The impact of weaker commodity prices continues to take its toll. Not all the news was bad; several companies reported better than expected earnings, Nike the sports clothing company in particular. The focus for investors remained on what could be considered a bell weather of the global economy in Caterpillar. Caterpillar whose share price has fallen sharply over the past two months as investors have anticipated the news, only fell another 6%.

 

The VW saga rumbles on, hardly surprisingly, the Dax index of leading companies is down 8% on the week so far. The Chief executive offered his resignation and was accepted, it may not be surprising to see other members of the board go over time. 

 

As the day wore on bond and equity markets waited for Janet Yellen to speak at the University of Michigan. After the lukewarm reception she received to the post rate announcement press meeting last week, markets hoped for a clearer explanation of the decision not to move on rates and the outlook in the coming months.

 

The headline comments from the speech were that Janet Yellen still saw a rate rise was likely to be appropriate before the year-end, but the decision remains data dependant. It remains strange to understand what will change significantly in the next two months to mean that a rate rise is appropriate in December but not in September. The bond market, as it has been doing for the past weeks hardly moved on the speech. If the true reason the Fed backed away from raising rates in September was a fear that the dollar would rise encouraging more flight of capital from the emerging markets, can that sentiment change dramatically in the run up to Christmas? Allowing the Fed to move, one has to remain skeptical.

 

Despite the broad weakness in equity markets yesterday, commodities had a slightly better day as oil and copper both rose modestly. This led to the materials sector being one of the outperforming sectors in the US. The biotech sector lagged, as equity markets as considered forward thinking time will tell if Caterpillar marked the bottom in sentiment towards the more cyclical sectors. 

Posted on September 25, 2015 .