The equity market fell apart late yesterday, reportedly in response to a headline that indicated Fitch Ratings said the outlook for U.S. banks could weaken if the eurozone debt crisis was not solved in a timely and orderly manner.

Thanks for the clarification, but seriously, was that really an insight market participants hadn't already been considering? 

The inference here is that the response was an overreaction in a thinly-traded market.  Nonetheless, the ease with which the market moved in response to a "tell-all" headline that told it nothing new at all went to show that confidence in a successful eurozone outcome is far from strong at the moment.

That same conclusion can be drawn by looking at eurozone credit markets, too, which are engaged in a cat-and-mouse game with the ECB where the cat is mostly winning.

The ECB could be the cat of course, but in sticking to its inflation mandate and the admonishment to anyone who will listen that it is not a lender of last resort, it has taken on the role of the mouse in this game.

The same dynamic we have seen in Italy's bond market since the EU Summit in October is in play again today:  the 10-year yield moved above 7.0%, setting off alarm bells, and then it ultimately reversed course on what participants have come to accept as the work of the ECB's invisible hand.   It currently sits at 6.88%.

The newer focal points this week, however, have been Spain and France, which have also seen their borrowing costs pulled inexorably higher by a lack of faith in the eurozone's ability to ring fence a debt crisis that began in Greece and, arguably, a lack of faith in the viability of credit default swap insurance.

Both Spain and France were able to issue new bonds today, although at much higher borrowing costs than prior auctions.  Yields on their 10-year notes are trading at 6.77% and 3.67%, respectively, in the secondary market and spreads relative to the German bund continue to widen in disconcerting fashion.

The move in these credit markets and the sting of yesterday's selloff in the U.S. weighed heavily on the S&P futures, which were down more than 12 points in overnight action.

Those losses, though, have been wiped out.  For the past few hours, the S&P futures have been rebounding along with Italian bonds and a belief, we suspect, that the selling yesterday in the U.S. was overdone.

The S&P futures actually turned positive a short time ago following better-than-expected initial claims and housing starts data.  The dynamic of better-than-expected economic data out of the U.S. has also been in play in recent weeks and it has been an offsetting source of support for market participants focused on the eurozone.

To be sure, it has helped major averages in the U.S. stand out as a pocket of relative strength compared to their foreign counterparts.

The latest report on initial claims shows that they declined by 5,000 to 388,000 (Briefing.com consensus 398,000) in the week ending November 12.  The downshift lowered the 4-week moving average to 396,750 from 400,750.

Continuing claims fell by 57,000 for the week ending November 5 to 3.608 mln (Briefing.com consensus 3.648 mln), which left the 4-week moving average at 3.670 mln versus 3.703 mln the prior week.

The moderation in initial claims levels is a welcome development, although the overall level still does not support the idea that job growth will greatly exceed normal labor force growth, thereby making it challenging to lower the unemployment rate.

Housing starts, meanwhile, slipped 0.3% from a downwardly revised 630,000 in September to 628,000 in October (Briefing.com consensus 604,000).  The slight decline was paced by an 8.3% pullback in multi-family starts, but notably, single-family starts increased 3.9% to 430,000.

Building permits increased 10.9% to 653,000 (Briefing.com consensus 603,000), which was a surprise that is likely to produce some ballast for the leading indicators report.

The S&P futures are trading about 0.1% below fair value, so the cash market is expected to have a flattish start.  That's not great after yesterday's retreat, but it is a much better indication than the indication seen about 12 hours ago.

--Patrick J. O'Hare, Briefing.com 

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service.  To request a free trial, please email researchsales@briefing.com.