The Perfect Storm Shows Up Indoors On Wall Street – As traders monitored the expected Blizzard named Juno, the above noted concerns stormed into Wall Street.
The Dow opened down over 250 points as trapdoors opened under a score of blue chips. Meanwhile, yields on treasuries plummeted on the stunning drop in Durable Goods and a Flight to Safety on renewed Greek worries.
The selling expanded through the morning, making what would be the day’s low (-390) near 11:00.
As Europe was getting ready to close, I sent this note to some friends:
Dow and Nasdaq Comp have been in virtual lockstep in leading on the downside today.
While the pundits zero in on dollar impact in earnings and depressing GDP, this selling is not America – centric. As I noted in this mornings Comments (courtesy of Peter Boockvar), Tsipras has spooked markets by not moderating his speech or actions.
Here’s a bit from an email from my friend, Barry Habib, the mortgage maven, who has called the bond market to a tee. He adds a good example on dollar influence:
The 10-year has just dipped beneath 1.78%. If yields can hold below this important Fibonacci level, the next technical floor is at 1.62%, which goes back to the lows of early May 2013. We think that it is highly likely that 1.62% will be tested and probably broken before too long.
And this morning’s data, along with earnings misses, show how Dollar strength along with lower oil prices are making a negative impact.
Here’s an interesting example that shows why US Multinationals are facing stiff headwinds from the strength of the Dollar:
Just 5 months ago a product selling for 1,000 US Dollars would of cost a European 745 Euros. Today that same item would cost them 900 Euros. That’s a 21% price hike in just 5 months! Is it any wonder why there are slower sales for US Multinational corporations?
(Unfortunately, the 10 year was unable to hold below 1.78% so the game is still on the table.)
Stocks tried to get up off the canvas but they only got to one knee and took the mandatory 8 count.
They continued to struggle and shortly after noon, I sent this follow-up:
They are off day’s low but have not been able to mount a credible rebound, so far. Oil continues to give hints of stability, which could help stock bulls.
Very active first 90 minutes stops dead as we shifted toward the European close. Today’s action must be a topic on first day of FOMC meeting.
Run rate at 12:15 projects to an NYSE final volume of 710/790 million shares.
(The afternoon drift left volume at the lower end, with the final volume barely under 710 million shares.)
Around 1:00, the Dow managed to climb above the opening level and stocks drifted higher as they trimmed the morning lows by nearly 50% by 2:45.
In the early stages of the liftoff several members of the trading division of the FoF cited an unusual potential tailwind. Here is a typical email from one:
Some tailwinds starting 2pmET —-> A 2011 NY Fed Staff paper shows that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon they call the pre-FOMC announcement “drift.”
The “drift” was a bit underwhelming. While we did reach the day’s highs 45 minutes after 2:00, we ultimately closed slightly lower than they were at 2:00. So, the first two hours of the 24 hour FOMC upward “drift” was at best a wash. We’ll see what the final 4.5 hours produce.
Greek Markets In Turmoil – Things in Athens continue borderline chaotic. The Greek stock market is down the equivalent of 2500 Dow points since Friday. Here’s a nice synopsis from my friend Peter Boockvar over at the Lindsey Group:
Any thought of pragmatism from the newly elected Greek government is quickly being thrown out the window. But, when you elect Marxists, this I guess is what you get. Greek capital markets are under major stress again today as they are losing faith that the negotiated process from here on with debts and budgets will go smoothly. The Athens stock market is down by another 8% and lower by 14% in just 3 days. Greek banks are down by 17-20% today alone. The 3 yr note yield is higher by 295 bps to 16.98% vs 10.1% as of Friday’s close. Greek 5 yr CDS is wider by 40 bps and has risen by 400 bps over the past three days. Alexis Tsipras held his first cabinet meeting today and pledged four priorities: 1)a return to dignity for the Greek people, 2)help the economy, 3)renegotiate Greek debt, 4)Get rid of corruption in government. He also wants to bring back a higher minimum wage just when the Greek economy needs to get more competitive. He wants to hire more government workers just as they have too many and he wants to freeze plans for privatizations just as the private sector is most needed. With respect to what everyone is most focused on, debt renegotiations, Tsipras today said “we do not want an extreme catastrophic clash…we do not want to go to mutually assured destruction but we won’t continue being subservient.”
Consensus – As noted above, there is an upward bias to FOMC days but favorable seasonals have not delivered for the bulls so far this year. With no press conference, temptation is to make few or even no changes in the wording. Hints of contagion in Europe may build a headwind. No time to let your guard down. Stay wary, alert and very, very, nimble.