Good morning. Monday started off with such promise for our heroes in horns. Fresh off what is now being called the "Spailout," Asian markets were higher and while not quite as enthusiastic, European bourses were stepping lively as well, which, of course, pushed the U.S. futures solidly into the green. The thinking was that the risk trade was going to be flipped to the "on" position as the euro-shorts ran for cover. And if things played out properly, this would send the dollar lower and risk assets higher.
With the most recent data showing that shorts in the euro currency (FXE) stood at an all-time high late last week, traders were supposed to be chomping at the bit. You see with a trade that one-sided it would only take a little encouragement for those late to the party to go scurrying for cover. And to hear the bulls tell it, "Spailout" was going to be just the ticket. Thus, many traders went to bed Sunday night with visions of USO, JJC, DBC, EEM, and SPY dancing in their heads.
Although, with the Greek election only a week away (Greece will hit the reset button on their latest election on Sunday, June 17), traders couldn't be blamed for remaining a little skeptical. So, as the opening bell approached in New York yesterday morning, the enthusiasm for the "Spailout" rally had been curbed a bit. Instead of the 12-15 point advance in the S&P 500 that had been expected earlier, the futures went out with a gain of 9.80. Certainly not bad for a Monday morning.
As usual, there was talk of the next resistance zone up at 1340 on the S&P 500 and the fact that "old resistance" would soon become "new support" on the charts. Thus, those technically inclined traders were expecting to watch the 134 and 132 levels on the SPY with a great deal of interest.
As is to be expected in these types of situations, the rally had its skeptics. In fact, more than one major news outlet had run headlines on Sunday suggesting that the anticipated rally would likely be short-lived. However, I'm guessing that those yammering on about the idea that the rally wouldn't last long didn't anticipate just how brief Monday morning's advance would turn out to be. For the record, my one-minute chart of the S&P 500 had exactly two green bars before the red began to take over the screen. Yep, that's right, stocks went up for two whole minutes before the bears got to work.
The problem was simple: the risk-on trade just wasn't working right. Instead of the euro surging on short-covering, it too began to move down in earnest after an opening pop. In addition, the dollar began to rally. And the commodities including oil, steel (SLX), and coal (KOL) moved down. Thus, this clearly was not the risk-on trade that had been anticipated and lots of folks started to ask what was going on.
It appears that the "Spailout" was long of hope and light on details. As has been the case with all the other last second saves during the eurozone crisis, no one was completely sure how the thing was going to work. However, we were assured that things would all be worked out after the independent bank auditors got done. It was at this point that eyes began to roll and the sell orders began to flow.
However, things really started to go to heck in a hand basket when interest rates in Spain started going the wrong way. Although Spanish bond yields initially moved lower on the announcement of "Spailout," bond traders must have figured out that the banks were going to be recapitalized with yep, you guessed it; the issuance of more debt. So, once again, the answer to the debt problem in Spain was to - obviously - take on more debt (they just wouldn't call it that on the sovereign books).
Before you could figure out how a fund with no money in it was going to lend money to Spain so that it could turn around and un-bankrupt its banks, well, rates in Spain started to climb. And by the end of the day, the yield on the 10-year was once again pushing 6.50% (it had been as low as 6.0% earlier in the day). So, given that the vast majority of this crisis has been about the risk that contagion would spread throughout the continent, traders sold stocks. And then they sold some more. And then they sold even more - because after all, it's still all about the rates in this game.
Turning to this morning ... Stock futures are pointing to a slight advance at the open on the back of ongoing concerns relating to the "Spailout", potential bailout of Cypress, and the upcoming elections in Greece. However, futures in the U.S. seem to be taking their cues from Europe on a tick-by-tick basis in the early going.
On the Economic front ... The NFIB Small Business Optimism index fell -0.1 in May to an overall reading of 94.4, which was above the consensus for a reading of 94.2
Next up, the government reported that Import Prices for the month of May rose by +1.3%, which was above the consensus for a drop of -1.3%. Export prices fell by -0.4%, which was below expectations for -0.1% as well as last month's level of +0.4%.
- Major Foreign Markets:
- Australia: +0.17%
- Shanghai: -0.70%
- Hong Kong: -0.43%
- Japan: -1.06%
- France: +0.42%
- Germany: -0.08%
- Italy: -0.52%
- Spain: +0.31%
- London: +0.37%
- Crude Oil Futures: -$0.53 to $82.17
- Gold: -$6.80 to $1590.00
- Dollar: lower against the yen , euro and pound
- 10-Year Bond Yield: Currently trading at 1.608%
- Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.97
- Dow Jones Industrial Average: +33
- NASDAQ Composite: +7.67