Good morning,

Markets are flat this morning before the ECB meeting next Thursday. The Euro Stoxx 50 lost 3.5% in the month of October compared to the S&P500 which gained 2.3%. This difference in performance of the two indices shows investors’ confidence in the US economy. Despite the Fed stating during the month that it will stop quantitative easing, data continued to show that the US economy is performing well despite the lagging economies of Europe and Asia. Growth in Q314 in the US came in at a strong 3.5% and unemployment kept on falling to 6.07% in the third quarter. Also companies in the S&P 500 continued to report positive results for Q314. 73% of the companies in the S&P500 reported results so far and 80% of them beat analysts’ earnings estimates.

Conversely, Europe’s weaker performance is a result of the German’s who keep putting pressure on the ECB not to adopt a US form of quantitative easing. The German’s want countries like Italy and Spain to solve their own problems rather than have the ECB solve them for them. Having said that, politicians have in the past gave the market reason to believe they will act in one way and in reality they do the opposite due to market pressure. Infact, half way through the month of October, the Euro Stoxx 50 lost 12.2% from its previous high in September. However the loss was reduced to 4.8% at the close of the month as investors called a bottom in the markets and started to price in ECB action.

Investors are now waiting for the next ECB meeting next Thursday. This meeting will be very important for the market because it will give further insight on Mario Draghi’s comment in his last meeting where he said the ECB will do whatever it takes to improve the situation in the Eurozone. Mario Draghi did surprise the markets in October when he cut interest rates, however the Asset Backed Securities buyback program did not have the desired effect on the European economy. Hopefully the pressure is on and the ECB will surprise the markets positively with its actions leading to a rally in European equity markets as we head toward the close of 2014.

JP Morgan came out with a report this morning saying that they expect 12% average return from MSCI Europe Index next yr, compared to 25% annually over last 5 years and “next to nothing” this year. Europe’s investment environment will not be as lucrative or strong vs last 5 years; while returns are roughly est. to halve to c12%, it’s still attractive in an low-inflation, low interest-rate environment. While valuations are not as extreme as back in 2009-2011, European stocks still cheaper than their long-term averages and most other regions like emerging markets, and compared to other asset classes.

In corporate news, Banca Monte dei Paschi di Siena SpA, one of 25 lenders that failed Europe’s bank health check, plans to raise capital to plug the entire 2.1 billion-euro shortfall identified during the review. The firm, bailed out twice since 2009, isn’t considering seeking further state aid or converting the securities already sold to the government into stock, Monte Paschi. In addition to selling new shares to investors, the world’s oldest bank said it also may dispose of financial assets to boost capital buffers.

HSBC Holdings Plc, Europe’s largest bank by market value, posted lower-than-expected third-quarter profit as it set aside more than $1 billion for customer redress and an investigation into rigging currency markets. Reported pretax profit rose to $4.61 billion from $4.53 billion in the year-earlier period, the London-based lender said in a statement today. That compares with the $5.47 billion average estimate of seven analysts compiled by Bloomberg. The bank set aside $760 million for bad loans and other credit provisions from $1.59 billion a year earlier.

Good day and happy trading!

Kristian Camenzuli