Daily State Of The Markets: Will The Fireworks Continue On Wall Street?

Includes: DIA, SPY
by: David Moenning

Good Morning. I know I'm supposed to be staying away from the keyboard in order to "recharge the batteries," but I can't help but comment on the extraordinary happenings that took place across the pond yesterday. While most of us were probably rolling out of bed or preparing for the July 4th festivities, the European stock markets put on a fireworks show of their own.

Here's what I mean. The FTSE 100 soared +3.08% yesterday. Italy's FTSE MIB was up even more at +3.44%. Spain's stock market spiked up +3.07%. France was higher by +2.89%. And Germany, apparently the dud of the display, was up +2.10%.

The catalyst for the pyrotechnics in Europe was not difficult to identify as Super Mario's words clearly lit the fuse for the explosive show. Below are the key sound bites from the ECB President Mario Draghi's news conference on Thursday.

  • ECB monetary policy will remain accommodative "for as long as necessary"
  • Draghi says we should expect rates to remain at present level or lower for an extended period
  • ECB President said the Council took "unprecedented stop on forward guidance"
  • Draghi said that current rates are "not the lower bound"
  • What Council did today was to inject a downward bias in interest rates for the foreseeable future
  • When asked about the definition of time frame, Draghi said, "It's not 6 months, it's not 12 months, it's an extended period of time."
  • Draghi said the OMT is as effective at being a backstop as ever
  • The ECB Council had an "extensive discussion about possible rate cut"
  • The ECB is keeping an open mind as to the potential for negative deposit rates
  • The ECB does not react to other central bank communications
  • The Council reacts to changes in the medium-term outlook
  • "Our objective is to maintain price stability, this goes in both directions, economy is part of this"
  • The OMT is not designed to be a substitute for government action
  • OMT is meant to address "tail risks"
  • "We all agree that low levels of interest rates entail serious risks for financial stability"
  • On the state of the economy, Draghi said:
    • The ECB's survey data has shown further improvement
    • But there is continued weakness in real economy and is still going down, but at a slower rate
    • The ECB sees economic recovery later in the hear
    • Inflation risks will be volatile
    • Loan demand remains weak
  • The ECB President noted that Portugal has achieved "very remarkable results, if not outstanding"
  • Draghi also noted that Greece has made "significant progress" and that this should be acknowledged

In short, Super Mario gave the markets exactly what they have been yearning for. The ECB President said that the Council is considering a rate cut, that rates will stay low for "an extended period of time," and that Portugal and Greece are making good progress.

So in one news conference, Draghi put an end to the fear that the ECB would do something dumb and pull the punch bowl prematurely, hinted at a rate cut (meaning that one was coming soon), and told the markets not to freak out about Greece and Portugal. If you recall, interest rates had been soaring in Portugal of late, which was beginning to attract attention.

The bulls will argue that with the Egypt dilemma being at least temporarily resolved and the European markets enjoying a significant joyride to the upside, the U.S. stock market ought to enjoy some pyrotechnics of their own on Friday. However, there is always a chance that traders may decide to train their algos exclusively on the June Jobs Report, so we should probably look alive this morning.

Turning to This Morning ...

Although European markets put on quite a show yesterday, traders in the U.S. appear to be curbing their enthusiasm in the early going. This is likely due to the pending Jobs report data, due out in less than an hour. Should the Nonfarm Payrolls report continue to be in the "Goldilocks" category (decent job growth but no real improvement in the unemployment rate) then traders will likely jump onboard the bull train. However, it is also worth noting that yields and oil prices are moving higher this morning (the 10-year has spiked to 2.579% this morning and WTI oil futures are back over $100 at $102.07), which could become a focal point at some point. Finally, we will remind everyone that all rallies have been sold into on an intraday basis since June 28th, so it will be important to see if this trend continues.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell ...

Major Foreign Markets:

- Japan: +2.08%

- Hong Kong: +1.89%

- Shanghai: +0.04%

- London: +0.47%

- Germany: -0.20%

- France: -0.11%

- Italy: -0.20%

- Spain: -0.66%

Crude Oil Futures: +$0.83 to $102.07

Gold: -$10.60 to $1242.30

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.579

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +12.18

- Dow Jones Industrial Average: +126

- NASDAQ Composite: +26.16

Thought For The Day ... A smile is the lighting system of the face, the cooling system of the head and the heating system of the heart

Positions in stocks mentioned: none