EmailBefore reading any further, keep this one thought in mind: last week the S&P 500 increased 5.6%.
In laymen's terms, that was a huge rally. In technical analysis terms, that means the market is overbought on a short-term basis, which means in laymen's terms that the market is ripe for some profit-taking activity after a huge rally in such a short amount of time.
OK, now that we have got that out of the way, it is worth noting that the S&P futures are trading about 0.2% below fair value, suggesting the cash market will begin the day slightly lower.
Naturally, there has been a rush to explain this "weak" position and all reports seem to be pointing to the Moody's downgrade yesterday of Portugal's debt to junk status and an announcement from the People's Bank of China after Asian markets closed that it is raising its one-year lending rate 25 bps to 6.56% and its deposit rate 25 bps to 3.50%.
There had been some speculation that China would raise interest rates for the third time this year in its effort to curtail inflation pressures, so this move isn't necessarily a surprise. That doesn't mean, however, that an overbought market won't respond to it.
By the same token, the Moody's downgrade of Portugal hit yesterday after European markets were closed, so today was their first chance to respond to a development that also can't be considered a true surprise. Nonetheless, European markets and the euro are soft today and that stance has been a halting factor in early U.S. trading.
It is also little surprise to see the U.S. Dollar Index (+0.5%) trading higher this morning and Treasuries fetching a bid as traders rein in some of their risk trades.
All in all, though, the needle isn't moving all that much in the U.S. when one stops to consider how far we have come in just a week's time.
The S&P 500 was up 5.6% last week and it is slated to slip a mere 0.2% at the open? The yield on the 10-year Note spiked roughly 30 bps and it is down just 2 bps this morning?
Said another way, don't believe the hype that there is real concern in the market today about the Portugal downgrade and China's rate hike. There isn't.
What we have is a market taking a breather after a strong run and working its way back toward the starting block to take on the challenge of Friday's employment report.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
