Market Not Ready for Surprise Headline

After celebrating the fact that the European Union leaders had come up with a plan to make a plan for a few days, the ugliness returned to the corner of Broad and Wall yesterday. Perhaps traders were simply getting into the Halloween spirit a little early. But just about the time many investors felt like it was safe to get back into the water, the market got slapped upside the head on yep, you guessed it; another surprise headline out of Europe. To which, one of my colleagues remarked, “Here we go again.”

Given the record-breaking ride the bulls had been on over the previous 18 days, even the most ardent bulls would agree that a pullback was in order. And after the Bank of Japan decided to start knocking down the yen, the resulting rise in the dollar flipped the risk switch to the off position. As such, stocks, emerging markets, and commodities were put in the sell category from the opening bell.

However, after the obligatory 6-minute decline, it looked like things had calmed down. I was of the opinion that we needed to watch to see how aggressive the dip-buyers might be. I figured that Monday might wind up being a “stand aside” day for those who like to buy merchandise on sale due to the upcoming economic reports. As such, I wasn’t terribly surprised to see stocks move sideways, within a fairly tight range, for the vast majority of the session.

Although I had opined earlier in the day that the market was at risk for some nastiness, I wasn’t really expecting the type of volatility we had grown accustomed to between August 1 and October 4. But then it happened. A surprise report out of Greece that Mr. Papandreou had decided to get his ducks in a row before pushing the new debt deal through. First, it looks like he wants to get a new vote of confidence for his government. Then with a mandate in hand, he plans to go to the public with the brand-new debt deal. The thinking is that unless the referendum fails miserably, the rioting in Athens might come to a halt.

But that’s not what the market “heard” from the report. And unfortunately, stocks were not prepared for the idea that a messy Greek default was back on the table. And at first blush, this is exactly what the report conjured up in the minds of traders. Well, that and the idea that this public referendum was also a vote on whether or not Greeks want to stay in the EU. So, as you might suspect, the computers did their thing and the indices gave up another 1% in a matter of minutes. But hey, after a great run in October, what’s another 1% off the top, right?

What I really found interesting is that there was a GREAT deal of chatter about the uncertainty relating to the European deal before the opening bell rang. Here are some of the headlines available to traders before 8:00 am yesterday morning:

• EU facing resistance in cash-raising push before G20 (Bloomberg)
• China warns it cannot cure Eurozone debt crisis (Telegraph)
• Junker says Europe will not offer China concessions for aid (Reuters)
• Japan, like China, cautious on SPV (Reuters)
• German Finance Minister plays down summit success (Dow Jones)
• Bundesbank head sees risk of crisis widening (Reuters)
• Italy business chief calls for Berlusconi to step down (Reuters)
• Rates still rising in Italy and Spain

My point is that there was already a fair amount of concern about the ability for the EU leaders to (a) finish the comprehensive plan and then (b) actually implement the plan (where exactly is that €800 billion coming from again?). And yet the markets hung in there very nicely up until the Papandreou headline hit the tape.

So, I guess I’ll ask it too: Here we go again? Will the markets go back to hanging on every hint, wink, and headline from across the pond? Or was this just something to occupy traders’ interests until the big slug of economic data starts to flow this week? I guess we’ll find out soon enough.

Turning to this morning… The tension created by Greece’s surprise referendum announcement (which is obviously a referendum on staying in the EU) has caused weakness in global markets. In addition, China’s PMI coming in below expectations didn’t help. With European bourses off 3%-5%, stock futures are pointing to a very weak open here in the U.S.

On the Economic front… We don’t have any economic data to report before the bell, but we wil get the important ISM Manufacturing number at 10:00 am eastern as well as the report on Construction Spending.

David Moenning
Editor:  The Daily Decision