Author: Sajjad Sheikhi
VIX Index Drops and Relative Calm in the Market
Simultaneously with the rise in stock indices, the VIX index, known as the market's fear gauge, declined. This index represents traders' expectations for the 30 day volatility of the S&P 500; an increase in it signifies fear and risk aversion, and a decrease in it signals calm and the market's willingness to take on risk.
The recent decline in VIX after last week 's rise came from a slower tone of trump towards china and positive signals of negotiations with chinese vice - prime minister . The market is now optimistic about negotiations , but traders should be wary as China has a hard position on withdrawal from the laws of rare earth exports.
expectations of reducing interest rates and its impact on risk taking
One of the reasons for the continuation of risk taking is to reduce interest rates . Official government data have not been released because of the shutdown , but private sector data show a negligible weakness in the labour market , which strengthens expectations of interest rates . federal reserve officials , including Mr Powell , also approved the need to reduce interest rates .
Despite the government shutdown , the US labour ministry will issue the September inflation data with a week 's delay . According to private sector data , the inflationary pressure resulting from the tariff is continuing , but it is not enough to prevent the interest rate from falling in October.
The season of reports on income generation and brilliant performance of banks
"With the start of the earnings season, approximately 85% of S&P 500 companies have reported higher than expected earnings. Usually, there is seasonal volatility in October, but the recent trend has been lower compared to historical standards, and the traders' mindset is 'buy in price correction'.
Banking Group and the Boom in Merger Deals
Last week, reports from Bank of America (BofA), JPMorgan, Morgan Stanley, and Citigroup were released, all of which had higher than expected profit and revenue.
Bank of America recorded $28 billion in revenue in the third quarter, primarily driven by fees from merger and acquisition (M&A) deals.
"The bank's investment banking revenue rose by 43% to $2.05 billion; advising on corporate mergers is one of the key activities of large banks, and the fee income from this segment has increased by 51%.
A reduction in tariff war uncertainties led to an increase in corporate merger activity, and BofA, which acts as an advisor and intermediary, recognized significant growth in revenue.
In total, merger and acquisition (M&A) deals in the third quarter exceeded one trillion dollars, which is considered the second largest record in history."
Net Interest Income and Investment Banking
Net interest income, which is the difference between the interest paid to depositors and the interest received from lending, increased by 9% to$15.2 billion. It is expected that as interest rates decline, the revenue from this segment will increase further.
JPMorgan, Goldman Sachs, and Citigroup also had similar reports, and the strong trend in investment banking is expected to continue.
Reports from Industrial and Technology Companies; A Market Test
This week, the market focus is on industrial companies, such as automakers, which provide a picture of the industry status and economic growth. Next week, technology giants will report, and this will be an important test for meeting investor expectations.
Trade Negotiations with China and the Risks Ahead
The four main negotiation topics include rare earth elements, fentanyl, soybeans, and Taiwan:
Rare Earth Elements:China has set rules stating that any country intending to export goods manufactured with Chinese elements must obtain a license. This issue is important for the US defense industry.
Fentanyl:US concern over the export of the drug fentanyl from China continues.
Soybeans:China has virtually stopped buying US soybeans and has replaced them with South American markets. This issue has put significant pressure on American farmers.
Despite these risks, most experts believe the earnings season results will be positive for the market. Artificial intelligence (AI) and technological advancements are key factors in improving corporate performance.
Small Cap Companies and the Russell 2000 Index
A decrease in interest rates makes financing easier for small cap companies. The Russell 2000 index represents this group, and it is likely that the positive trend in this segment will continue.
Market Summary and Outlook
Optimism regarding the US-China negotiations and the earnings season have led to a positive sentiment in the US stock market.
The S&P 500 index has nearly recovered all the losses incurred from the risk aversion event on October 10th.
Trade negotiations with China remain a major uncertainty factor for the US economy and stocks.
The backdrop of lower interest rates in the market will benefit small cap companies and the Russell 2000 index.