Stocks could struggle to find firmer footing Wednesday, as the debate about the merits of more Fed easing continues to swirl.
Weekly jobless claims at 8:30 a.m. could be a factor, as could potential headline risk from Europe, where concerns about peripheral sovereign debt are increasingly spilling into global markets. The focus now is on Ireland's shaky finances, as its government bonds slid to a fresh low Tuesday.
Wednesday's data also includes international trade for September and import prices for October, both at 8:30 a.m.
Criticism of Fed easing was just one of several reasons given by traders Tuesday for a market day that saw the dollar reverse course to close up nearly a percent against the euro. Traders circulated a story that a Chinese rating agency downgraded U.S. debt to A+, but while they said the report was not a market mover it was seen as more negative sentiment from abroad about the Fed's easing plans.
Bond prices fell as the government auctioned another $24 billion in 10-year notes. An auction of $16 billion in 30-year bonds is expected at 1 p.m. Wednesday. The Fed will also announce the schedule for its purchase of more than $100 billion in Treasurys, the first purchases under its new quantitative easing program.
"You've seen a retracement of the QE trade today," said John Briggs, Treasury strategist at RBS. "On a broad brush stroke, it's a QE unwind."
The dollar Tuesday shook off morning losses, and moved sharply higher, to close up about 1 percent against the euro. The dollar also gained against the yen and pound. Many commodities rallied, before a late day reversal. The Dow slumped 60 to 11,346, and the S&P 500 was down 9 points to 1213.
Financial stocks were the big losers on the day, down 2.2 percent. The FDIC Tuesday approved a new fee structure for banks that shifts the burden to bigger institutions and premiums would be based on potential risk.
Peter Boockvar, Miller Tabak equities strategist, said the pull back in stocks may be just what the market needs.
"Considering the run we've had down less than 1 percent in the S and P is not really statistically significant, but the equity market can't keep using QE2 as an excuse to buy stocks if the dollar is no longer selling off and Treasurys had not rallied. Something had to give, and it gave today," said Boockvar.
"The whole trade's been one way, and the market got extremely overbought," he said. Boockvar said the reflation of commodities prices is also a double edged sword for stocks, helping some companies and hurting others.
"I think the market continues to correct. It got too easy on the upside. That would set up for a rally into year end," he said.
Another factor that rattled markets in afternoon trading Tuesday was the announcement by the CME that it was raising silver futures trading margin, effective Wednesday. Silver was rose sharply to $28.90 per ounce, the highest settle since March, 12, 1980, but it lost its gains in late trading. The iShares Sivler Trust ETF traded about 8 times its normal volume after the news. Gold, oil and grains also sold off.
"The change in the silver margin threw everything off," said Art Cashin, director of floor operations at UBS. "With (Fed Chairman Ben) Bernanke about raising asset classes, a lot of people thought they were getting a free pass..Now it appears they're worried about a bubble."
"Bernanke can't get his QE2 working here," he said.
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