With grim headlines from Ukraine and China, a bad week for major global indexes is coming to an end.» Read More
There is significant worry that the recent decline in copper and China's economic woes might be the start of a wider correction. There are certainly some concerns reflected in the market internals: fewer new highs overall, and no Dow Jones Industrial Average components having hit new highs.
Still, it's hard to see imminent signs of a significant market drop. The advance/decline line is still near a new high, and that usually turns down well in advance of a significant market correction.
I would also note that financials have been market leaders recently, with the main Financial ETF at a new high on Monday. They usually turn down early as well.
The U.S. stock market is essentially at a historic high. To keep advancing, markets will need:
Traders are waiting for U.S. March economic news, and they are expecting it to be better. They are clinging to ANY shred of evidence that this is the case.
For example, Wal-Mart's (WMT) CFO said the company has seen very good sales since mid-February as the weather has improved. The stock jumped just before 1:00 p.m. ET as news crossed.
So far, the jury is still out. Holding pattern.
Regardless: There is already a cynical school that insists the markets will have a tough time advancing in April, even if the economic data improves.
It goes like this: If the news is disappointing, markets will react negatively. If we do get an improvement in the economic data, stocks will still struggle, because the market has already priced in the idea that the data will be better.
Under this scenario, it would take blowout economic numbers..well beyond expectations...and assurances by the Fed that they will not be raising rates any time soon...for there to be another breakout.
I don't buy this. The pattern for the last four years has been that the market haters have been wrong.
Traders are having a tough time reading the tea leaves on this one...is it due to a drop in demand in China, or some other factor?
First: Much of this is due to the weak yuan, the Chinese currency, which makes purchasing copper suddenly more expensive. Since China accounts for roughly 40 percent of world copper consumption, a weaker currency is a major part of the problem.
Why are the Chinese authorities allowing the yuan to weaken? Most likely, they are seeking to curb hot money flows and slow speculation. And if that means less construction and less copper consumption, so be it.
Second: The recent three-day weakness in copper has occurred exactly in line with China's first default on a domestic bond (Chaori Solar). Today there are reports that another Chinese company electrical equipment maker and solar panel manufacturer, Baoding Tianwei Baobian Electric, saw its bonds and stocks suspended from trading after reporting losses for a second year running.
Some of this is likely a knee-jerk risk-off reaction. But copper is used as collateral for loans in China; as prices dropped, borrowers could be under pressure to post more collateral, just as investors trading on margin might be required to do.
This may be good for China long-term, but it's a problem for stock investors. There has been a loose correlation between the movement in copper and the Chinese Shangahi Index for the past few years, largely because China has been so associated with commodity consumption.
Ending that relationship may be a bit traumatic.
Bottom line: Authorities are trying to lower risk in the financial system, and this may be affecting copper.
Third: What about fundamentals? Is China starting to come apart?
The shockingly poor trade numbers China posted last week (the biggest drop in Chinese exports in 4.5 years...the biggest trade deficit in 2 years) were a real wake-up call. There are already whispers that China's GDP in 2014 would not come in at the 7.5 percent level, but could slip into the 6 percent range.
That seems unlikely, but almost certainly, China will have to engage a significant stimulus program to stay in the 7 percent zone.
But officials are already concerned about debt levels: That's what all the issues I discussed above are about.
See the quandary?
The country is still heavily dependent on debt to keep going.
Attention high frequency trader watchers: Virtu Financial (VIRT) has filed for an initial public offering (IPO), seeking to raise $100 million on terms not yet been specified.
Virtu is a well-known market maker in over 10,000 stocks, on both the NASDAQ and the New York Stock Exchange (NYSE), where they are a designated market maker on the floor. They aren't just well known in the U.S.: they operate in 30 countries.
A high-frequency trader going public? I've heard some argue that the market must be nearing a top for that particular industry.
The biggest drop in Chinese exports in 4.5 years...the biggest trade deficit in two years in China...had a clear impact on the stock market today.
Commodity stocks of all stripes, along with the stock markets of countries with significant commodities business (China, Brazil, Australia, South Africa, Peru, etc.) were all down. Europe also closed down, with the German market down roughly 3 percent in the last two days.
Of course, many have said this was part of a predictable cycle of building inventory going into the Chinese New Year, but the concern is that recent weak data there supports a broader slowdown story.
There are reports that inventory continues to build, vague rumors of banks not getting paid from the mills, iron-ore traders not getting paid. Banks said yesterday that they were going to start intervening at the ports. Buyers want extensions to the banks and the banks are refusing.
The concern is that China GDP is not going to be 7.5 percent, it's going to closer to, say, 6 percent.
China, remember, accounts for the majority of world steel production, so a drop like that is significant for commodity producers.
Higher cost producers hit hard. When markets have over capacity, you look at the higher cost producers, and many of them are in the United States. Cliffs Natural Resources (CLF), for example, makes no money with iron ore at $100, which is about where it is now. That's why U.S. producers are getting hit so hard.
Other iron ore producers in other countries can make money at lower prices. Australia, for example, has a weaker currency, lower shipping costs, and a general lower cost structure. So companies like BHP Billiton (BHP) and Rio Tinto (RIO) all have lower costs.
This issue of China growth is part of a larger conversation. Remember, stocks are at all-time highs. The primary argument to keep stocks going in 2014 is a lift to global growth, with the U.S. helping to lead the way.
But if you take out China, that makes the lifting much more difficult.
And it calls into question stock valuations worldwide.
China's February export data sent the Shanghai Index reeling overnight, which tumbled 2.9 percent overnight, and is not far from the lowest levels since August. Exports plummeted 18.1 percent from a year earlier, and with imports are up 10.1 percent China is now operating in a trade deficit of $23 billion for the month.
Copper is down another 1.25 percent today after a four percent drop on Friday; it's now near its lowest levels in a year as China demand wanes. Yet it's not just copper: other base metals are going nowhere.
What's up with banks? Since Monday's close, I have noted that banks have been outperforming...a trend that is now stretching into four days, particularly the largest institutions.
Banks this week:
Likely causes for the rally...
Another explanation is that there is still a lot of cash on the sidelines, especially in Europe. One trader noted to me that In Europe, we saw two huge secondary placements last week at almost no discount to market. Gjensidige sold its 20% position ($550 million) to the market at a 3% discount and RBS sold its 28% position in Direct Line ($1.6B) at no discount. I know some Europeans are flush with cash due to the Verizon/Vodafone deal but to place $2B in 30 minutes at little discount tells me there is a lot of cash that still needs to be put to work.
And why is Bank of America a leader? Several traders told me the worst is behind them on the litigation front and there is a belief the core banking business is slowly improving.
Stocks are at new highs, but where are the bargains? Amid a fairly lackluster trading day on Wednesday, we saw big financials mount an impressive rally.
With the S&P 500 up 0.7 percent this week, some of the major banks have really separated from the pack:
BofA up 4.4 percent
Morgan Stanley up 3.8 percent
Goldman Sachs up 3.3 percent
JPMorgan up 2.4 percent
This is important, because banks have been considered relative bargains, at least until this week. Once more, investors seem to be buying into banks— and discounting the slower macroeconomic story we have seen so far in 2014.
Strange day...breadth negative all day, all major indices moving in a very narrow range, volume lighter.
There is some selective strength: The most positive thing today is financials. The Financials ETF (XLF) is close to its January highs...and Bank of America (BAC) has put in a monster move, up three percent today, and five percent over the past two days.
The Fed Beige Book complained of severe weather impact throughout the U.S. economy. So essentially ALL data on February has been thrown out...none of it matters...ISM Services weak today, ADP not great either...but it doesn't matter. It's weather.
And this is what will happen on Friday with the Jobs report: They will throw it out if it's bad because of weather, but push markets up if it's good.
"You can't have 'one off' explanations month after month after month, quarter after quarter," one hedge-fund trader said to me today. "Monday was a sharp day down, Tuesday was a sharp move up, today we went sideways and consolidated, looking for a catalyst to spur the next move."
So it doesn't matter (the Feb data) unlessand until, the March data doesn't improve precipitously.
Solar equipment producer Chaori Solar said it may not be able to make an 89.8 million yuan ($14.6 million) interest payment that is due on March 7.
This is getting a lot of attention because it would be the first Chinese default of an onshore bond. The country's solar industry is heavily subsidized by the government and has enormous overcapacity. Prices for photo-voltaic cells have dropped dramatically.
But this goes beyond the renewable energy sector. There is enormous overcapacity in many Chinese industries, such as steel and coal. Chinese companies have issued enormous amounts of debt in the past several years, so a default will definitely raise the issue of credit risk.
A classic relief rally...7-to-1 advancing-to-declining stocks. Cyclicals advancing along with defensive names. Eight of the 10 S&P sectors up more than one percent. Volatility Index (VIX) reverses and drops from 16 to 14 and change, back to its recent trading range.
When the market moves up this quickly...particularly when it hits new highs...it forces people to act and get in.
There is heavy volume in the Russell 2000 ETF (IWM)...midway through the day, it has already done a full day's volume, and that is significant. This is a huge hedging vehicle for active traders.
What's up? It was always unclear what the scope of the military action in the Ukraine would be. It still is, but an outright invasion of the whole country--with tanks rolling into Kiev--now looks very unlikely. A lot of traders assumed the tension in the Ukraine would go on longer. It still isn't over, but there is certainly a sense that there has been a de-escalation of sorts.
Why? As I pointed out in my TraderTalk note this morning, Putin is likely reacting to economic issues over geopolitical issues. "The economic burden that it can impose on Russia is tremendous," one international trader said to me. "Putin's a smart guy, and he knows his fragile government cannot withstand that economic hit (which gives rise to civil unrest, and often times, revolution) and so he will come quickly to the table."
If this story stays relatively quiet, we will quickly shift to Friday's February Jobs report. Everyone knows the survey week was a bad weather week, so a poor payroll number will likely be discarded quickly, even though it would be the third one in a row.
A stronger report would encourage risk-on.
The market is now up more than seven percent since the February 5th low.
JPMorgan's chief U.S. equity strategist, Tom Lee, said that a "construction boom" seems imminent and should boost stocks.
Global investment management firm Pimco underperformed its peers last month, according to estimates by data tracker Morningstar, following internal strife at the company.
A lot of people think of it as an Old Boys Club but the truth is, Wall Street likes to hire 'em young, says former trader Raj Mahal.