Two moves from global central banks this morning are getting a lot of love from investors. The central bank of China announced its first interest rate cut in more than two years in order to lift it’s softening economy and the European Central Bank officially began to repurchase asset-backed securities. With markets that were incredibly volatile just last month on fears of global weakness, these two announcements have pushed both the S&P 500 and Dow Jones Industrial Average up nearly 1% on the day. The announcement out of China’s central bank also sent oil futures higher, paired with speculation that OPEC will decide to reduce oil production when they meet on Thursday. The hope is that lower interest rates in China and a move by OPEC will stimulate demand for commodities.
So what does this mean for U.S. companies? One of the biggest concerns during the third quarter earnings season, as expressed by roughly 20% of all S&P 500 companies, was a softening in Europe that was impacting the bottom-line. Even this week we saw TJX Companies report that their European segment was the weakest link in Q3, with same store sales down 1%, although the blame was placed on seasonally warm weather. As stimulus begins to take hold, it should be good news for U.S. companies operating in that region. Currently, about 10% of all S&P 500 sales come from Europe.
China was not as big of a concern for U.S. companies in the third quarter, with many saying they still find growth opportunities there. Although, there is no denying that the most recent Q3 GDP reading of 7.3%, the slowest in 5 years, leaves a lot to be desired after the double digits seen in 2009 and 2010. The fear here is that if China continues to moderate, and Europe falls into recession, even 6 – 7% growth out of China may no longer be enough to offset weakness elsewhere. Both of today’s moves should have a positive impact on S&P 500 companies in 2015.
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