Fed Stands Ready
Given that the quick 500 point rally in the stock market this week has taken place largely without an identifiable catalyst – or at least one that made much sense – we are left to wonder about the meaning of such a move. I fully recognize that in the age of HFT and levered funds, there doesn’t necessarily have to be a reason behind a big pop these days – especially after the market had fallen -17% in less than three weeks. However, in an effort to stay on top of the market’s driving forces, I do try to understand what is behind the market’s bigger moves.
It was fairly easy to understand the initial decline in the indices yesterday morning. Overnight we had seen Moody’s downgrade Japan’s sovereign debt rating, which, while widely telegraphed, sent Asian markets lower. In addition, the news from across the pond wasn’t exactly inspiring as Industrial New Orders were below expectations and the German IFO Business Climate took an impressive dive. Now toss in the fight that is developing over the Greek bailout deal, which appears to have some serious issues in getting approved by all 17 Eurozone countries, and well, one could see why the confidence might fade at the open.
Then the report on Durable Goods was released and at least for a moment it seemed like there was some good news to cheer. But while the headline was higher than expectations, there were some issues in the report that definitely put a damper on the “beat” (for example, vehicle orders soared in response to supply chains finally being restored after the earthquake in Japan). And then there was the fact that this “good news” was from July, before all the carnage in the stock market got started.
However, traders didn’t seem to care much about the details of the report as stocks quickly shook off the open and moved higher. But then came the report from a group named Medley Global Advisors (whose founder was once the chief strategist for George Soros), which, in short, said that there isn’t going to be any hint of QE3 from Mr. Bernanke on Friday nor any hints of any kind for policy changes from the Fed.
Given that part of the reason stocks rallied on Tuesday was the hope that the Fed chairman was about to pull another rabbit out of his hat, this report seemed to cause traders to have second thoughts. In fact, there was word that this report was responsible for the Dow moving back below the breakeven line before lunch. Thus, one could argue that market expectations are for Mr. Bernanke to ride to the rescue once again on Friday.
However, the Fed watchers I trust seem to believe that Bernanke is most likely to simply review the options the Fed has at their disposal and to try and soothe market fears with a statement to the effect that the Fed will stand ready to deploy their tools as needed. However, in light of the fact that stocks have been rallying this week on little-to-no news (well, okay, there was the report that ECB didn’t do anything funky with a bank this week, word that the White House has a major refinancing plan up its sleeve, and the big rebound from the beaten down banks), I am left wondering this morning if “standing ready” is going to be enough.
Turning to this morning… The big news overnight was the resignation of Steve Jobs from his CEO post at Apple due to medical reasons. However, the news has not impacted the global markets, which continue to rally. Futures in the U.S. are currently pointing to a mixed-to-slightly-lower open.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 8/20 rose by 5,000 to 417K. The report was worse than the consensus estimate for 404K and last week’s revised total of 412K (up from 408K). Continuing Claims for the week ending 8/13 came in at 3.641M vs. 3.700M and last week’s 3.721M.
David Moenning
Editor: The Daily Decision
