EmailIt was another volatile day of trading yesterday as participants reacted and overreacted to every little headline surrounding Cyprus.
Stocks rolled over in early action, reportedly on concern that the Cyprus parliament was going to vote down the proposal to levy a tax on bank deposits to help pay for a needed aid package. Then, stocks rallied late after the Cyprus parliament did in fact vote down the deposit tax idea. Go figure.
From our vantage point, we figured the situation in Cyprus has essentially been used as an excuse to take profits from an overextended market rather than being a direct selling catalyst. In other words, there is clear correlation in the market's recent weakness but less clear causality. To be sure, the moderate volume accompanying this week's losses does not fit the notion that there was a fear-based trade related to Cyprus.
Strikingly, the S&P futures have spiked this morning on headlines suggesting Cyprus may be on the verge of working out a solution with Russia to its financial problems.
That sounds better than a worst-case outcome, but if there is one thing this Fed-supported market knows how to do, it is to take seemingly good news and run a lot farther with it than is warranted.
Arguably, what should matter more to the market today is the disappointing earnings report from FedEx (FDX) whose fiscal 2012 revenue was nearly two times the size of the Cyprus economy.
FedEx posted a fiscal third quarter profit of $1.23 per share that was $0.15 below the Capital IQ consensus estimate and issued fourth quarter and FY13 guidance below consensus estimates. In fact, its FY13 guidance of $6.00 - 6.20 per share is 7% below the prior fiscal year at the midpoint. The weak outlook was pinned in part to weak trends in its international business.
Shares of FedEx are trading nearly 4.0% lower in premarket action, which will weigh on the highflying Dow Jones Transportation Average.
We're not sure if that will act as a strong headwind for the broader market, which is anxiously aware that today is also an FOMC day.
At 2:00 p.m. ET, the FOMC will release its latest directive and updated economic forecasts. The Fed chairman will hold a press conference at 2:30 p.m. ET to discuss the Fed's views.
While there have been some encouraging signs of late in the economic data, it is widely expected that the FOMC will stay the course with its monetary policy and that the directive will continue to stress that risks remain tilted to the downside.
Knowing the Fed is here to stay and that it buys agency MBS and Treasury securities at a monthly pace that is nearly four times the annual economic output of Cyprus is apt to keep participants interested in buying on dips that might be correlated with headlines surrounding Cyprus or, alternatively, forcing a rally that is correlated with headlines surrounding Cyprus.
The S&P futures are currently trading 0.6% above fair value.
