EmailThe S&P futures are currently trading 0.4% above fair value, setting the stage for a positive open for the cash market. The upside bias rests yet again on central bank support and follows a mixed session on Monday, where the equity market ebbed and flowed off better-than-feared manufacturing surveys and a defensive speech by Fed Chairman Bernanke on monetary policy.
Today, the market's attention has turned down under after the Reserve Bank of Australia unexpectedly cut its cash rate 25 bps to 3.25%. This was a welcome hit for a market addicted to central bank stimulus.
The rationale for the move stemmed from a belief that "the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with target." That weaker outlook was related to concerns about Europe's contraction, the slowdown in China, and the modest growth in the U.S.
In other words, the Reserve Bank of Australia thinks things are not looking so great in the real economy. That view and the connection to corporate earnings, however, doesn't resonate for participants caught up in an alternate reality that is governed by a sense that central bank support will save the day.
At some point, the two worlds will collide, and if it is readily apparent that the alternate reality is a farce, things could get ugly. In brief, it is increasingly risky to invest on the hope of central bank support while ignoring the reality of weakening fundamental factors.
For now, though, the market continues to choose not to fight the Fed and its central bank cohorts.
Speculation that Spain may soon ask for a formal bailout has also provided a boost this morning. Spain itself has denied such reports; nonetheless, the optimism is in the market as evidenced by a 1.6% gain in Spain's IBEX and a 12 basis point drop in Spain's 10-year note to 5.73%.
There isn't a lot of corporate news of note this morning, although it is worth noting that Mosaic (MOS) reported a fiscal Q1 profit of $1.01 per share that was $0.15 shy of the consensus estimate on an 18.7% decline in revenue. Meanwhile, retailer Express (EXPR) cut its Q3 EPS guidance sharply, citing an abrupt change in traffic in September.
Both stocks are indicated lower in premarket action. The broader market will open higher -- and why not? Those are only shortcomings tied to the real economy.
