EmailWe closed yesterday's Page One with the reminder that the market will experience turbulence from time to time irrespective of the policy support provided by the world's leading central banks -- and perhaps one day because of it. Well, suffice it to say, the equity market had a turbulent ride yesterday that left participants shaken up by the time the closing bell rang.
The S&P 500, which had been up as many as 10 points, or 0.7%, early in the session, ended the day down 28 points, or 1.8%, with losses accelerating over the final hour. In conjunction with that late slide, the yen and US Treasuries surged while the euro sank.
There wasn't a specific news catalyst for the yen's surge, so it was attributed to bearish bets being closed after the news that policy dove Haruhiko Kuroda was going to be nominated governor of the Bank of Japan. Maybe so, but it was peculiar to us that the yen powered higher late in the US trading session. Short covering undoubtedly played a part in the yen's surge.
The euro's weakness was more understandable as it stemmed from the election uncertainty in Italy, which got the market reversal going yesterday. Briefly, things came apart on the concern that a hung parliament in Italy will reignite concerns about Italy's fiscal situation specifically and sovereign debt in the eurozone in general.
Today, news reports suggest Pier Luigi Bersani's Center-Left party has a slim majority in the lower house, but that no party won enough seats to control the upper house. The Center-Left reportedly won 119 seats while Silvia Berlusconi's Center-Right party won 117 seats.
Either a contentious coalition will need to be formed or another vote may need to be held. At the moment, Italy is the picture of political uncertainty. Italian bond yields have risen more than 30 basis points and Italy's stock market is down 4.3%, pacing large declines in other major European markets.
Asian markets fell across the board as well in sympathy with the US market. Japan's Nikkei was down 2.3% on the back of the stronger yen while China's Shanghai Composite fell 1.4% on lingering concerns about potential tightening measures to curb property prices and excess liquidity from stoking inflation.
Things are looking a little better in the US this morning. The S&P futures are trading about 0.3% above fair value, which is pointing to a slightly higher start for the cash market.
Better-than-expected earnings results from retailers Home Depot (HD) and Macy's (M) have lent support.
Home Depot set the pace, topping fourth quarter expectations by three cents. Its FY14 EPS guidance was below consensus estimates, but that shortcoming has been overshadowed by the added news that the company raised its quarterly dividend by 34% and authorized a new $17 bln buyback program.
The real source of support, however, is none other than Fed Chairman Bernanke who will be providing his semi-annual testimony on the economy and monetary policy before the Senate Banking Committee at 10:00 a.m. ET. Mr. Bernanke is expected to face tough questions about asset purchases and the Fed's ability to manage the withdrawal from quantitative easing. The presumption ahead of his testimony is that he will walk a dovish line that is supportive for equity prices.
We will see soon enough, but the market at the moment is reflexively betting that the Fed chairman will provide some calming remarks after yesterday's striking reversal that saw the CBOE Volatility Index jump 35%.
Today's economic calendar features the S&P/Case-Shiller Home Price Index (Briefing.com consensus +6.5%; prior +5.5%) at 9:00 a.m. ET and the New Home Sales (Briefing.com consensus 383,000; prior 369,000) and Consumer Confidence (Briefing.com consensus 62; prior 58.6) reports at 10:00 a.m. ET.
