We may be seeing some sort of return to calm, at least on some levels. General Electric’s results have futures moving higher – the stock is up 3 percent in premarket action – and there’s a general sense that some of the selling has exhausted itself, at least for the time being.
After several days of rapidly careening lower, the market seemed to hit its washout moment late Wednesday, when a torrent of selling pushed the 10-year Treasury to 1.86 percent and more than 4 million S&P e-mini futures contracts changed hands.
There’s a glut of various stresses operating in the markets right now: Europe’s inability to get out of its own way, the sharp fall in oil prices that probably says more about supply issues and lackluster demand in Asian markets than the United States, the uncertain path of the Federal Reserve and a nagging concern that weak inflation figures show the economy really isn’t healing all that much.
But make no mistake about it – Ebola is a pressure point for markets at this moment, and one only need look at the “scare” moments in markets to really see it.
The equity market stabilized on Tuesday but only just barely – a 0.16 percent gain on the S&P 500 is nothing to write home about – but that the market bounced off support levels around 1,876 was notable enough.
One thing for sure is that the short-sellers are finally having their day in the sun after many years of walking around with a cloud over their heads, a la Joe Btfsplk from the L’il Abner comic (yeah, we’re busting out Depression-era references here), as Svea Herbst and Jenn Ablan reported in an overnight story.
Time to sit up and pay attention. Monday’s end-of-day regurgitation of 100,000 futures contracts in a five-minute span around 3:30 p.m. (1930 GMT) would have been more nerve-wracking had we not already seen the same thing writ small, when about 30,000 contracts were dumped in the waning seconds of last week’s trading action.
In each case, the activity was striking and a bit disturbing. See, it’s never a great sign when the only thing that ends the selling on a given day is the moment when they turn the machines off (a la Randolph and Mortimer Duke), and Monday wasn’t all that much different.
The focus as we head into this week is earnings, with about 10 percent of the S&P 500 set to report results. That represents about 19 percent of the market capitalization, with reports from Intel, Wells Fargo and several banks coming in the next few days.
But it’s the chipmakers that have people excited; or rather, on heightened alert after Microchip Technology surprised investors last week with a warning that suggests a further slowing in chip demand worldwide.
Heading into the end of a violent week and ahead of a slew of earnings reports, the market has swung from one extreme to another, as the average daily move in the S&P 500 rises dramatically, as futures promise another big drop at the open Friday, and as investors try to take stock of what’s happening here in their beloved stock market.
The U.S. economic growth situation hasn’t changed all that much – after all, jobless claims continue to fall and the expectation again is for another strong earnings season. And, as awful as Europe is right now, there’s only so much damage its economy can do to the U.S. The extent of that should be known before long if recent German data is any guide.
Days like Wednesday are the ones that remind investors why the Federal Reserve is what it is, and how some believe the other world central banks cannot compete, even as some expect the European Central Bank and Bank of Japan (to an extent) to take up the slack the Fed will leave behind when it ends quantitative easing in the next weeks and prepares for its first interest-rate hike some time in the third quarter.
The odds on that hike, by the way, shifted late Wednesday after the Fed’s minutes showed there was concern about moving policy too quickly. It’s the pace of increases that worries the Fed, not the idea of doing it at all. The Fed is likely to push rates to about 50 basis points either in July or September (the market is betting on September now, the Fed is probably thinking July), but it’s important to keep in mind that the monetary policy committee is not going to then start doing the one-move-per-meeting thing they did in the last rate-hiking cycle back in the Pre-Cambrian Era.
Just when the market thought it was out, it got pulled back in. The Federal Reserve will release its minutes later in the day that details what it was thinking during its most recent September policy meeting, but of late, the markets have been of a mind that the expectations for higher rates ought to be tempered a bit.
On Tuesday, New York Fed head William Dudley suggested in remarks that the chances of economic growth in the long-run coming in faster than anticipated is a fantasy that people should get shut of – and so that helped take down the market and not ironically contributed to a further decline in the five-year/five-year forward spread that serves as one of the market’s best barometers of inflation expectations.
Beware of companies tying their fortunes to one company – something both the debt and equity holders of GTAT Advanced Technologies learned painfully on Monday, when the company filed for bankruptcy. While it’s nice to look ahead at the rest of the world, the mechanics behind some of the selling is so severe that it’s worth delving into just a little bit here.
For the uninitiated, shares of this company’s stock had taken off in the last 12 months as investors grew excited over the possibility that its sapphire glass would be used in Apple applications – it even built a facility in Arizona dedicated pretty much for this. But as with everything, fine print matters, and Monday, it mattered to the tune of an unbelievable 92 percent drop in shares, the kind of thing usually seen only in stocks that trade on over-the-counter exchanges, or, well, names like Bear Stearns.
The preparation for tighter U.S. monetary policy is showing up in markets in a number of areas, most notably through the appreciation of the dollar which has a greater affect on GDP growth than people sometimes realize. Rising strength in the greenback, which would be expected to continue given the dovish monetary policies being pursued in Europe and Japan, turns into notable weakness in a number of U.S. sectors tied to exports like autos and energy.
Citigroup’s William Lee dives into this by pointing out that substantial rallies in the dollar have the power to brake GDP in a way that Fed tightening even doesn’t, saying GDP growth could decline by a percentage point if the rapid move in the dollar continues through early 2015.