On the Lookout for Stray Comments From Europe
Thanks to Europe, traders could find themselves playing defense in this holiday-shortened week.
Thursday is the last trading day of the quarter, and the gains in stocks are rich – 10.3 percent for the Dow and nearly 9 percent for the S&P 500. Markets are closed Friday for the Good Friday holiday, and traders expect light volume other days this week due to the Passover holiday.
Already, there have been signs of quarter-end positioning, as some capital moved back into the Treasury market after a strong quarter of equities gains. "Last week we started to see some of these asset allocations early," said David Ader, chief Treasury strategist at CRT Capital. "I think there is more to come."
Early Monday, stocks were bounding higher on the Cyprus bailout agreement with the S&P 500 just tenths away from its all-time closing high of 1565 when a European official's comments short-circuited the rally and sent the euro, stocks and other risk markets into a tailspin. The Dow ended the day down 64 at 14,447, while the S&P fell five to 1551,13 points from its intraday high.
Dutch finance minister Jeroen Dijsselbloem, head of the Eurogroup, was quoted as saying that Cyprus was a template and that other bank bailouts could include bond holder and shareholder involvement, as well as depositors. The comment sent traders out of euros and stocks and into the safety of Treasurys, as they worried the rescue of any European bank now would mean the assets of depositors were at risk. Bank stocks in Europe and the U.S. were lower.
His comments were later clarified by a spokesperson who said he did not say Cyprus was a template for other bank restructurings, but he did not back down from his view that the private sector should take the lead on bank bailouts. The euro moved from a high of the day at $1.30 to $1.28, and the yield on the 10-year Treasury slipped to 1.90 percent, at one point from a high of 1.97 percent. The yield was at 1.92 percent later in the day.
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"The markets were Dijsselbloem-ed," one trader quipped. Cyprus delayed the reopening of its banks until Thursday, after the tiny nation worked with European officials and the IMF late into Sunday night to structure a 10 billion euro bailout. The plan includes paring down Cyprus's oversized banking system, with the closure of one major bank, Popular Bank of Cyprus and seriously downsizing another, Bank of Cyprus, resulting in losses for the holders of deposits greater than 100,000 euros.
What to Watch
In the U.S. Tuesday, economic reports include durable goods at 8:30 a.m. ET, and consumer confidence at 10 a.m. New home sales are also due at 10 a.m., and S&P Case/Shiller home price data is reported at 9 a.m. The Treasury auctions $35 billion in two-year notes at 1 p.m.
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As the new quarter approaches, the debate about whether stocks will see a meaningful pull back continues. Some analysts say sluggish earnings growth may be a catalyst. High profile comments like those last week from FedEx, Oracle and Caterpillar are making some cautious.
"With every quarter, as we approach it, there's a tremendous amount of skepticism…and then we come through it and we wind up with a quarter that may not be robust but is better than expected," said John Stoltzfus, Oppenheimer Asset Management chief market strategist.
Stotlzfus said he is bullish and expects the S&P to easily see 1600 this year.
Ader said an interesting data point last week showed that major Treasury investors are more short 10-year duration than they've been any time since the financial crisis. He pointed to a Stone and McCarthy survey of fixed income money managers which showed investors were short duration at the greatest amount since the fourth quarter, 2008, after a big one week drop. He said they starting getting short at the end of last year, and the stronger-than-expected economic data would be one reason.
"From a contrarian standpoint, when you have everyone this short and particularly this short, you could say it's run its course, but from a more macro perspective, it certainly reinforces the notion that people are bearish the bond market," he said. "That's not news per se, but they talk about it and now they are positioned for it."
Comments from the Fed and Chairman Ben Bernanke after the Fed's meeting last week reinforced the notion that the Fed could start winding down its asset purchase program in the fourth quarter and end it by the middle of next year. The wind down could be accompanied by rising rates, even if the Fed keeps its target rate near zero. The Fed is buying $85 billion in Treasurys and mortgage securities each month.
Stoltzfus said it would take a big rate move to hurt stocks. "I think rates ultimately are a risk, but I think we have a while to see rates rise before it becomes a risk to the market," he said. "You could see the 10-year go from 1.99 to maybe 2.5, 2.75 percent, maybe even three percent, but if it did that gradually, the market could digest that…what coul get hurt is the bond market, Treasurys could get hurt right away from that."