Stocks started the week worried about the weakening dollar but have since developed a case of bond market phobia.
Those worries abated a bit Thursday after follow through from the Treasury's $26 billion 7-year note auction did not generate any new turbulence in the Treasury market. In fact, long dated Treasurys firmed after the auction, and stocks moved higher.
On Friday, a few pieces of economic data could affect trading. At 8:30 a.m., the final look at first quarter GDP is expected and economists expect to see the decline narrow a bit from 6.1 percent to about 5.5 percent. Chicago purchasing managers data is due at 9:45 a.m., and consumer sentiment is released at 9:55 a.m.
From Fast Money
"The bond market fears have subsided somewhat. It's all the equities guys have been talking about for three days," said Patrick Boyle of LaBranche Financial, as stocks drifted higher in the final minutes before Thursday's close. The Dow finished the day up 103 points, or 1.25 percent to 8403. The S&P 500 was at 906, up 1.5 percent.
On Wednesday, a surprise wave of selling shook Treasurys and mortgages, even after the Treasury conducted a successful $35 billion 5-year auction. Traders Thursday had braced for more of the same and continue to fear rates could continue rising.
"I think that's the focus. That's why you don't have a whole lot of volume. People need a little more confidence in the bond market," Boyle said. "One thing decent about today's rally is it's really broad based. Nothing's really ripping, but everything's up a little bit."
End of month related trades could create some volatility for bonds Friday, said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald.
"We got through another week, but this is only the last week in May. We have seven months left this year, and then we are still facing a tremendous amount of borrowing needs in the future. We certainly, at this point, are testing the ability of the capital markets to fully function, and the ability of the U.S. government to finance itself."
Traders said it was mortgage-related selling that created a spike in 10-year rates Wednesday, but that type of hedging activity eased Thursday. Still, Edmonds said the Treasury market is being driven by what's happening in mortgages.
"You may see month-end selling in mortgages. Month end can be a little funky," Edmonds said.
Jim Caron, global head of interest rates at Morgan Stanley, said the mortgage-related hedging is a new dynamic for the market. "People are still wondering what the Fed's response is going to be to all of this. It's still pretty much unclear," he said. "I don't think there's anything that will stop it. If the Fed comes out and makes a statement, sure that will stop it. But as far as we see there's nobody there to stop it. The Fed is going to continue to buy ... I think the Fed is trying to figure out how high rates could go."
"I think at some point if it (the 10-year) trades up to 4 percent, the markets will look at it as a negative feed back loop," he said.
Caron said a lot of market rumors lately focus on Asian investors holding back from U.S. markets. He said they have been reluctant buyers of U.S. mortgages and agencies. "Asia has been buying Treasurys at a record pace, but they're primarily buying the front end," he said.
Treasury Secretary Timothy Geithner visits China early next week. "What China is basically saying is they need guarantees the U.S. is going to act fiscally responsible," Caron said.
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"I think what he probably could do is just reassure the markets ... or just reassure one of the biggest holders of U.S. assets that the U.S. government is going to act fiscally responsible and not just blow up the Fed balance sheet," he said.
Marc Chandler, chief currency strategist at Brown Brothers Harriman, said Geithner's first trip to China is important but probably will result in little. "This is to reassure China that the U.S. is not going to inflate its way out of trouble," he said.
He noted the Chinese currency moved slightly lower this week, and it weakened when former Treasury Secretary Hank Paulsen's visited in December. "My sense is the Chinese do not want to be badgered about their currency. The real imbalance is not between the currencies but between labor costs."
"At the end of the day, I don't think anything comes out of it. These meetings are to prevent crisis," he said, adding there could be some bilateral business deals announced.
The dollar fell slightly against the euro to a level of $1.3941 per euro, but it climbed 1.8 percent against the yen to 96.92. Many commodities moved higher. Weekly inventory data pushed oil higher, but traders also said inflation concerns helped support crude. On the NYMEX, oil finished up 2.6 percent at $65.08 per barrel, its highest price since Nov. 5.
Chandler said the dollar is poised to continue moving lower. "The bounce in the dollar seemed to be very shallow and short-lived. That tells me the momentum is on the downside for the dollar. We've got to see positive numbers, not just slowing contraction," he said.
After the Bell
Dell profit fell to $290 million or $0.15 per share, from $784 million or $0.38 per share. However, it beat analysts' estimatesand its stock rose in late trading.
Dell, unlike some other companies, said it is too early to call a bottom , but interestingly, it sees a wave of buying coming from U.S. companies next year. Dell management said they believe enterprise customers are beginning to plan for next year's investments and they see a "powerful" upgrade cycle.
J.Crew stock rose in after hours after it reported first quarter net fell to $20.4 million or $0.32 per share, better thane expected by analysts. Marvell Technologyfell after it reported a loss of $39.5 million.