Good morning. When you are wrong, you are wrong, so you might as well admit it. Although the stock market had failed to freak out as expected both in front of and then after Wednesday's much anticipated FOMC announcement, it did deliver the goods on Thursday. So, while the title of yesterday's meandering morning missive was certainly appropriate for the time period in question, the words "Freakout Fakeout" certainly looked silly by the time Thursday's closing bell rang as the stock market had been walloped for losses of 2% or more across the board.
Prior to Thursday's thrashing, the stock market had acted pretty well in the face of all the news flow out of Europe and the economic data which clearly showed that a global slowdown was becoming entrenched. However, yesterday's market was a horse of a completely different color as a call to arms went up early to any and all traders with a bearish bent.
While the bears had clearly been frustrated over the past two weeks, they sought their revenge on Thursday in response to what in hindsight looked like a perfect storm for our furry friends. First there were the preliminary PMI's (purchasing managers index), which are designed to indicate the state of the economies around the world. So let's see ... China's HSBC PMI came in at its lowest level since November, European PMI's, as you might expect, indicated that the economies of the continent aren't improving (well, okay, France's preliminary numbers were up from last month's), and the new Markit PMI for the U.S. told of the weakest rate of expansion in eleven months.
Next, there was the action in the oil market. In case you don't follow such things on a daily basis, oil has been in a steady decline since the second day of May. And then in the early going yesterday, oil broke down to new lows for the year, announcing to anyone listening that global growth is indeed a problem (My Econ 101 class taught me that slower growth means less oil consumed).
To be honest, neither of these two issues were worthy of the beating that stocks took yesterday. However, the next two items did serve as a call to arms for the bear camp. And to say our furry friends responded with enthusiasm is a bit of an understatement.
First came word that Moody's was planning on making good on their threat to downgrade the world's biggest banks (I guess they'd run out of countries to cut). The problem here is that a lower credit rating for the folks at Bank of America (BAC), JPMorgan (JPM), Citi (C), Credit Suisse (CS), Deutsche Bank (DB), JPMorgan (JPM), Morgan Stanley (MS) et al means that the cost of capital goes up as well as all kinds of collateral requirements for the fancy securities these banks create and deal in. And in short, higher costs are bad for profits.
And finally there was the Goldman Sachs "call" to clients to get short the market, right here, right now. Goldman opined in an email that the Philly Fed Index (Oops, did I forget to mention that the Philly Fed did an impressive swan dive in June? Yea, that didn't help much yesterday either) was probably good for a 5% pullback, so they put a downside target on their "call" at 1285. And given that the S&P was trading at around 1350 at the time "the call" certainly sounded like it had some potential.
Now toss in the headline that Germany is planning to delay approval of the ESM (the next EU bailout fund) and the Fiscal Compact (which, as I recall, was actually Germany's idea) and word that Spanish banks might need a few more euro's than most had anticipated, and well, the call to arms seemed to be well received by those in the bear camp.
So, will Goldman's "call" become a self fulfilling prophecy now that Moody's finally did get around to downgrading all those banks? Will the ongoing mess in Europe make the call even easier to achieve? Or will next month's economic calendar become a call to arms all on its own? If nothing else, we'd make a note of the 1285 level and keep an ear for the next call. You never know, this one might be positive.
Turning to this morning ... Although Asian and European markets are lower in response to the downgrade of major banks at Moody's, U.S. futures are pointing to a modest rebound at this time.
Major Foreign Markets:
- Australia: -0.97%
- Shanghai: -1.40%
- Hong Kong: -1.40%
- Japan: -0.29%
- France: -0.81%
- Germany: -1.04%
- Italy: +0.02%
- Spain: +1.18%
- London: -1.02%
- Crude Oil Futures: +$1.42 to $78.62
- Gold: +$5.40 to $1570.90
- Dollar: lower against the yen and euro, higher vs. euro
- 10-Year Bond Yield: Currently trading at 1.631%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.00
- Dow Jones Industrial Average: +35
- NASDAQ Composite: +4.44