EmailHere we go again (literally). It is a new trading day, yet some malevolent forces are rearing their ugly head again. In particular, worries about the eurozone are front and center as protests over austerity measures flare up in Spain and Greece. Meanwhile, the U.S. equity market seems to be recoiling at the thought that central bank support might not be the saving grace many had hoped it would be.
To be sure, there are signs of flagging confidence in the reflation trade executed by the Federal Reserve, the ECB, the Bank of Japan, the Bank of England, and China's government.
Oil prices are sinking (-$1.29 at $90.08), semiconductor and transport indexes are lagging, earnings warnings are rising, the euro is fading, and major equity markets are on the defensive.
The S&P 500 for its part has given back nearly all of its gains from the post-QE3 announcement rally. A mere five points is all that stands now between the level the S&P 500 was trading at the day before the FOMC decision. The yield on the 10-year Note is 12 bps below where it was trading on September 12.
The trading action Thursday provided a sense of group awareness that the equity market had gotten overbought, as the market ultimately reversed itself following encouraging economic news in the form of the S&P/Case-Shiller Home Price Index and the Conference Board's Consumer Confidence report.
The technical condition of the market was just one factor that resonated as a selling catalyst. Others included media images of protests in Spain turning violent, remarks from Philadelphia Fed President Plosser that QE3 won't do much to stimulate growth, the cautious-sounding outlook from Caterpillar (CAT), and the roll in shares of Apple (AAPL), which closed nearly 3.0% off their intraday high.
Another causal factor reportedly was maneuvering by fund managers to protect gains going into quarter end (and the fiscal year end that is around the corner for many).
The weakness in the U.S. carried over to foreign markets, many of which are battling the same forces. Japan's Nikkei dropped 2.0%, yet Europe is the real sore spot today as every major index is down at least 1.0%. Spain's IBEX leads the way with a 3.5% loss. Adding insult to injury is the marked jump in borrowing costs for Spain. Currently, the yield on its 10-year note is up 23 bps at 5.96%.
Spain's prime minister has indicated he will seek a bailout if yields stay too high for too long, but (you knew there would be a but) he will need to determine if the terms of conditionality are reasonable. This has the potential to get ugly, as pride typically goeth before the fall.
For the time being, market participants will have to deal with some familiar demons that could lead to an increased bout of volatility into quarter end.
The S&P futures are trading slightly below fair value, signalling a slightly lower start to the day for the cash market.
--Patrick J. O'Hare, Briefing.com
