Market Insider

Market Insider: Wednesday Look Ahead

More selling could be in store Wednesday as oil's wild ride higher threatens to again derail stock prices.

Wednesday's market has little economic news to focus on in the morning hours, but oil inventory data is released at 10:30 a.m. and that could spill into equities markets if it gets crude moving.

Later in the day, traders will be paying attention to the minutes of the FOMC's April 29-30 meeting, when they are released at 2 p.m. With those minutes, the Fed will release economic forecasts from the Fed governors and regional presidents.

Separately, Fed Governor Kevin Warsh speaks at 1 p.m. His topic is using the Federal Funds rate in extraordinary times, something we've all now seen.

Wall Street is watching those minutes carefully to see how much commitment the Fed shows to fighting inflation and how worried it is about growth. Increasing signs of inflation have some traders speculating that the Fed is coming to the end of its easing cycle and not all that far away from shifting gears to push rates higher.

Deutsche Bank chief U.S. economist Joseph LaVorgna says the Fed may have updated its forecast to show downward revisions to growth and upward revisions to unemployment. He said the Fed could have taken unemployment closer to the 5.6 percent he is forecasting for the end of they year.

Tuesday's stock market reacted violently to a rise in core PPI, another record oil price and renewed fears that the credit market problems have not gone away. AIG stock fell sharply after it said it raised about $20 billion in new capital, more than analysts expected.

"it's the continued concern coming back in the credit markets," said one trader of the market's selloff. "I think everyone got a little happy early. It seems every time you turn around there's something bad" about a financial company.

Scotsman Capital Managing director Vince Farell said he expects to see a turn in Wednesday's market. "It'll be down and then rally again a little, just when it shouldn't," he said.

The Dow Tuesday lost 199 points, or 1.5 percent in its biggest decline since May 7. The Nasdaq was off 41 points or 1.6 percent, and the S&P 500, slid 13 points, closing at 1413, below the key 1420 level.

Oil, meanwhile, rose to a new high above $129 and the dollar shrunk a whole percent against the euro.

Credit Un-Crunching

Miller Tabak's Tony Crescenzi, in a note titled "Credit Crisis Waning," said Tuesday there are plenty of signs around that the credit crunch is getting resolved. One example is the flood of new bond issuance.

Crescenzi said there are further signs of healing in housing. Crescenzi said it looks like Washington will pass legislation to insure $300 billion in mortgages, a move that is good for financial markets. He also noted that subprime mortgage re-sets are peaking and will drop from $40 billion per month to less than $10 billion. He also says banks have written off significant amounts of losses in housing, which will limit downside risk.

Crescenzi said one risk though is inflation. "A key risk to this scenario is inflation. The more it worsens the more delayed the economic recovery will be, hence posing risks to housing and the credit markets. I would watch chain store sales very closely in this respect. If they pick up, expect the ISM index to move back above 50 and to buoy markets. We won't know enough until late June or early July. Stay tuned. Expect resilient markets until then," he wrote.

Stocks in the News

B.J.'s Wholesale and Solarfun report earnings before the bell. Computer Sciences, PetSmart and Limited Brands report after the bell.

Earnings on Deck

Boeing holds an investor day in Seattle and Citigroup hosts a health care conference in New York. American Airlines, Halliburton, Intel, Northrop Grumman, Southwest Air and Wellpoint hold annual meetings.

Investor Days and Meetings

Investors will also consider the outcome of Tuesday evenings primaries, where N.Y. Sen. Hillary Clinton received the nod from Kentucky voters and Ill. Sen. Barack Obama was expected to take Oregon.

MPG Matters

In case you forgot why you thought it was OK to buy an SUV not that many years ago, take a look at these numbers provided by M.F. Global Senior Vice President John Kilduff:

Crude oil prices were at their low point on November 19, 2001: $16.71 per barrel.

At that time, there was a row underway between OPEC and Russia over market share. It was described as a price war at the time. Take a look at how the crude oil supply demand stacked up versus today: (IEA)

2001: Crude oil SUPPLY EXCEEDED demand by more the 1 million barrels per day. (Supply: 76.7 million bpd / Demand 75.7 million bpd)

2008: Crude oil DEMAND EXCEEDS supply by almost 5 million barrels per day. (Supply: 82.6 / Demand 87.23)

Trend worth watching

Long-dated oil futures contracts, December 2016 to be exact, were trading above $138 Tuesday, as money flooded into late year contracts.

Questions?  Comments?