Good morning. It is often said that markets are never wrong, but people/traders often are. As such, I should probably begin this morning's meandering market missive with the caveat that I too just might be wrong with my conclusion. But, since I've been wrong a time or two before and it is a safe bet that I will likely be wrong again at some point in the future, I'm okay with that. So off we go.
Long-time readers know that I'm a bit of a stickler about understanding the "why" behind a market move. I'm a firm believer in the idea that there is indeed a "why" behind every major move in the stock market. In fact, I'm of the opinion that the "why" is oftentimes much more important than the "what" or the "how."
To be honest, as I sit staring at the keyboard this fine day, I find myself scratching my head a bit. Maybe its the pine pollen or the lack of humidity here in beautiful Evergreen, Colorado. But to clarify, my head scratching isn't because I don't know the "why" of Tuesday's rather surprising 163 point joyride to the upside as the sudden spike in stock prices clearly occurred after Chicago President Charles Evans said on Bloomberg TV that he has been in favor of "pretty much any accommodative policy" he had ever heard of. No, the head scratching has more to do with the fact that the "why" is kinda silly.
If you are not familiar with Mr. Evans, he is what is known as an economic dove. This means that he favors growing the economy at all costs over worrying about something as inane as inflation. When in doubt, the doves like to stimulate, stimulate, and then stimulate some more. As such, it shouldn't have surprised anyone when a well known, outspoken dove said what he was expected to say - that the solution to the problem right now is, yep, you guessed it; more Fed balance sheet extension, more Treasury purchases, and more MBS purchases.
This was not like the case we saw last week, when one of the Fed's doves decided to announce his concerns about the effectiveness as well as the costs of yet another QE fix. No, Mr. Evans stuck to the script and effectively said the Fed should do more.
Thus, it shouldn't have surprised anyone that the "risk trade," which generically includes stocks (SPY), commodities (DBC), emerging markets (EEM), Dr. Copper (JJC), junk (JNK), and a dollar short (short UUP), took off following Mr. Evans remarks. Each and every one of the risk trade components spiked higher in unison. So, there wasn't really much mystery there.
No, the mystery and the head scratching started when I began to think outside of the QE box for a moment. Sure, traders would love nothing more than for the Fed to embark on another big batch of bond buying. But not because they think it might be good for the country [the results of the first two rounds of QE are questionable at best and were accompanied by some rather serious consequences such as the 30% to 50% increases in oil (USO) and grains (JJG)], but because by now every investor on the planet knows how to put on the "risk trade" when the Fed starts buying bonds. To be sure, the trading community's cry for more QE isn't about keeping the economy out of the soup, but rather about trading profits and trading profits alone.
But I digress. The point is that the "why" associated with Monday's big dive, which included a dramatic reversal from early gains associated with "Spailout," had to do with spiking rates in Spain. After the bank bailout was announced, rates on Spanish government 10-year paper moved lower to around 6.0% from 6.2%. But then upon further review of how "Spailout" would function, traders decided it best to sell Spain's sovereign debt in earnest. And as one might expect, when it was reported early Tuesday morning that Spanish rates had moved up further, stock futures weakened.
So, what did stock prices do when the yield on Spain's 10-year went to a fresh new high above 6.72%, eventually hitting 6.8% on the session, or when Italian yields followed suit, or when spreads "blew out" to the upside? Oh, that's right; stocks rallied 163 points, of course.
If one backs away from the emotion of the current market, it would appear that Ms. Market is telling us that hope (as in the hope for more QE) trumps fear (as in the fear of contagion and an implosion of the eurozone). What else can we take away from the recent action? Well, other than the trend of the last five days has been green, red, green, red, green. So as I mentioned, either hope truly trumps fear, or ... this has simply reached the stupid stage.
Turning to this morning ... Oversears markets were mixed overnight with Asia mostly higher and Europe mostly lower. U.S. futures have moved lower on the Retail Sales numbers and point to a modestly lower open.
On the Economic front ... The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for May fell by -1.0%, which was below the consensus estimate for a rise of -0.6%.
Next up, the Commerce Department reported that Retail Sales were down -0.2% in the month of May, which was in line with the consensus for -0.2%. When you strip out the sales of autos, sales were down -0.4%, which was below the consensus for a reading of +0.0% and last month's level of +0.1%. And when you take out autos and gasoline, sales were off by -0.1%.
Major Foreign Markets:
- Australia: -0.17%
- Shanghai: +1.27%
- Hong Kong: +0.82%
- Japan: +0.60%
- France: -0.16%
- Germany: -0.37%
- Italy: -0.30%
- Spain: +1.12%
- London: -0.10%
- Crude Oil Futures: -$0.17 to $83.15
- Gold: -$0.80 to $1613.00
- Dollar: lower against the yen and euro, higher vs. pound
- 10-Year Bond Yield: Currently trading at 1.686%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -0.76
- Dow Jones Industrial Average: +4
- NASDAQ Composite: +1.3