Good Morning. To be sure, there are times when the market's "logic" makes little sense to anyone not familiar with the way the game is played. Cutting to the chase, this would appear to be one of those times. Tuesday's rally, which took the S&P 500 back to within a positive tweet of its all-time high, was a pretty good example of this concept.
As I got to my desk at about 5:15 am Tuesday morning, I was expecting the worst. Before I had gone to bed, I had seen the report on China's HSBC Flash PMI. The report, which is designed to be a preliminary and/or independent read on the state of the country's manufacturing sector, had not only come in below expectations but had fallen from March's reading. And while the index reading was still above the "growth" line, there wasn't much room for error left in the number. As such, the Shanghai index had fallen -2.55% overnight. Ouch.
As I scanned my emails for updates on overnight data, I came across the preliminary PMI readings for the eurozone, Germany, and France. In short, the readings weren't good ... eurozone: 46.5 vs. last month's 46.8. Germany: 47.9 vs. 49.0. France: 44.4 vs. 44.0. Okay, to be fair, the France number was actually a "beat." However, the problem in the report was Germany. You see, Germany is the strongest economy in the eurozone and if they are starting to struggle, well ...
Then there was Markit's Flash PMI for the U.S. manufacturing sector. And just like the vast majority of the other economic indicators that were not housing related, this one too missed the mark. April's Flash PMI was reported at 52.0, which was well below the consensus estimate of 54.2 and March's reading of 54.3. In fact, you have to go back to last September to find a lower reading. Ughh.
And while I didn't report on it, the Richmond Fed index also came in well below expectations. This seemed to match the decline in the Chicago Fed National Activity Index, the Philly Fed Index, the LEI, and the Empire Manufacturing Index for April. In case it isn't obvious, the point is that the vast majority of the recent data points have come in weaker than expected lately.
And if you will recall, it was a turn in the economic data that helped produce the severe stock market corrections that occurred in 2011 and again in 2012. And since the S&P's bounce off of important support over the past two days hadn't exactly been robust, one couldn't be blamed for expecting to see an ugly day on Wall Street yesterday.
Next, for some reason, the cover of the latest Barron's also zipped across my brain. My thinking was that the image of a grinning bull bounding around on a pogo stick was likely the icing on the cake for the bears and that we might see the advance of last two days erased in about 10 minutes.
So, what did stocks do yesterday in response to all that negative data? The Dow gained 152 points, of course! Sure, there was a 2-minute span Tuesday where the algos pulled all their bids and the Dow plunged 145 points in 120 seconds in response to the "hack job" tweet that said Obama had been injured in an explosion at the White House. But the dive was erased almost as quickly as it had arrived (it took 3 minutes for the Dow to recover after the drop) and before long, the bulls were back on track. Perfectly logical, right?
If you are relatively new to the game, this is called the "bad news is good news" environment where traders celebrate the idea that the ongoing spate of weak economic data means that nary a single central bank around the globe is likely to pull their QE punch bowls any time soon.
Another way to look at the situation is the recent weakness in Germany has increased the expectations that the ECB will cut rates at their next meeting. In addition, the latest macro developments across the pond have added to calls for a shift away from austerity and towards policies that stimulate growth in the eurozone.
How did the European bourses react to the bad news yesterday, you ask? Not too bad, actually. The FTSE 100 was the laggard of the group and closed up +2.00%, while Germany's DAX gained +2.41%, Italy's MIB was up +2.93%, and France's CAC 40 soared +3.58%. As such, the bad news did indeed appear to be good news.
So, while today is another day and traders may very well decide to shift their computers' focus to the next shiny object, for now at least, it appears that bad news is good news again and that the concept of a Goldilocks economy is just fine for all that money sloshing around in the financial system these days.
Turning to This Morning ...
The "bad news is good news" rally is continuing to some degree in Europe this morning as Germany's IFO Business Climate result confirmed yesterday's weaker than expected data. Here at home, earnings continue to be in focus. Procter & Gamble (NYSE:PG) shares are sliding after it's earnings report, which may put some pressure on the "safety trade" here in the U.S. At this juncture, futures point to a flat-to-mixed open on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: +1.53%
- Hong Kong: +1.73%
- Japan: +2.32%
- France: +0.77%
- Germany: +0.63%
- Italy: -0.71%
- Spain: +0.60%
- London: +0.26%
Crude Oil Futures: +$0.33 to $89.51
Gold: +$14.30 to $1423.10
Dollar: lower against the yen, euro and pound
10-Year Bond Yield: Currently trading at 1.717%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.17
- Dow Jones Industrial Average: +25
- NASDAQ Composite: -6.82
Thought For The Day ... "Poor is the pupil that does not surpass his master." -- Leonardo da Vinci
Positions in stocks mentioned: none