The bond market could call the tune for stocks Wednesday.
Stocks have done little more than drift this week on low volume. The market edged higher Tuesday, while a slumping dollar drove up commodities prices. Oil closed above $70 for the first time in seven months, a psychological level traders say could draw more money into crude.
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The Treasury market, though, is what stock traders are most fixated on. The auction of $35 billion in 3-year notes Tuesday was well received, but the auction of $19 billion in 10-year notes Wednesday is causing some trepidation. For the most part, the auction is expected to do well but it could drive rates higher, a potential negative for stocks.
The Dow Tuesday fell 1 point to 8,763, while the S&P 500 rose 3 to 942. The Nasdaq though jumped 17 to 1,860, driven higher by a move in technology stocks.
Oil could pump higher Wednesday, after finishing at $70.01 per barrel, a gain of 2.8 percent. "There was a bullish API report tonight. If we see that again tomorrow, it will be off to the races," said John Kilduff, senior vice president at M.F. Global.
The American Petroleum Institute reported after the close Tuesday that oil inventories fell dramatically - by 6 million barrels to 357.9 million the week ended June 5, much greater than the expected 400,000 barrel decline. On Wednesday, another batch of oil inventory data is reported by the DOE at 10:30 a.m.
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"I think that will show a very decent draw down in inventories," Kilduff said. He said the next move in oil could be to a range of $72 to $73 per barrel, and then it could retrace. "The dollar getting pummeled brought the inflation trade back in vogue," he said.
Commodities moved higher across the board, and the materials sector was the stock market's best performer, rising 2.3 percent. Copper jumped 5 percent to $2.3655 per pound, an 8-month high, and aluminum was at a six-month high. Grains were also higher with soybeans setting a nine-month high.
The dollar fell 1.2 percent against the euro, to a level of $1.4079 per euro. It fell 1 percent against the yen.
What To Watch
The Fed's beige book on the economy is the big item to watch Wednesday, when it is released at 2 p.m. There is also April international trade at 8:30 a.m., and the Treasury monthly budget for May is released at 2 p.m. The Mortgage Bankers Association reports on mortgage activity for the week ended June 5, at 7 a.m.
Richmond Fed President Jeffrey Lacker speaks on the economy before the North Carolina Senate Appropriations Committee at 10 a.m. Fed Gov. Elizabeth Duke speaks on consumer protection at a conference sponsored by the Cleveland Fed at 12:15 p.m.
At 2 p.m., the Senate Banking Committee holds a hearing on the auto industry's bailout. Treasury's Ron Bloom testifies.
Tension From Treasurys
Bonds saw buying along many sectors of the curve Wednesday, after recent selling sent yields substantially higher. The 10-year's yield fell Tuesday to 3.858 percent, and the two-year's slipped to 1.301 percent.
Michael Franzese, who runs Treasury trading at Standard Chartered, said he expects to see selling into the auction, which could push the yield on the 10-year to 4 percent. Stock traders have said 4 percent could have a negative, psychological impact on the market.
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"I think you can get to 4 percent because of the amount of supply that's coming into the back end," he said. There is another auction of $11 billion in 30-year notes Thursday.
Franzese said, however, that it would be easy to see buyers step in if some piece of data in the next couple of days is not as positive as expected, such as the jobless claims data Thursday. Yields could then move lower.
Ten banks Tuesday revealed they would be returning $68 billion in moneythey borrowed from the government's Troubled Asset Relief Program. Some of those companies, like American Express , saw their stocks rise, but the S&P financials sector traded just moderately higher, finishing up a half percent.
"I think people expected it so it's kind of buy on the rumor, sell on the news. On balance, the fact that they've paid it off, and the fact the government allowed them to is a positive. But there's no dancing in the street, and there shouldn't be," said Milton Ezrati, senior economist and market strategist at Lord Abbett.
Ezrati, like many market watchers, has been expecting the stock market to pull back, and yet it hasn't. "Fundamentally, we think the market is still cheap even with these movements," he said. "If you look at the consensus for earnings for next year ... you might be a little skeptical ... Whether you're looking at corporate or Treasury bonds, the stock market if you look at PEs or market yield is as cheap as it's been the last 50 years."
He continues to expect the pull back, but he expects the market to also move higher. He said he likes the early cycle stocks, like consumer discretionary, technology and industrials.
The Supreme Court Tuesday evening cleared the wayfor the U.S. government-backed sale of Chrysler to a group led by Italian carmaker Fiat, a victory for the bankrupt automaker and the Obama administration.
The high court rejected a request from Indiana pension funds and other opponents of the transaction to delay the deal while they challenge Chrysler's sale to a group led by Fiat, a union-aligned trust and the U.S. and Canadian governments.
The Chrysler case has been widely regarded as setting a precedent for General Motors, which is using a similar quick-sale strategy in its bankruptcy in New York.
Investors have found corporate bonds, both investment grade and high yield to be a bright spot in the last couple of months. At the same time, corporations are bringing record amounts of issuance to a ready market. According to Lord Abbett, there has been $32 billion of investment grade issuance since June 1 alone.
Greg Peters, head of credit strategy at Morgan Stanley, said he expects the attractiveness of corporates to be a long term trend.
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"We still remain pretty constructive, particularly on the investment grade side. We think it's a multi-year cycle. I think you'll see good performance over the next couple of years. High yield is more tricky. There's been a massive rally there. It's kind of the more dicey names that have rallied of late," said Peters.
"I think it's a big month and a big year" (for issuance). Corporations are going to get in while the getting is good ... One reason is they are moneying up again ... the funding markets are fickle, and secondly I think they believe the coupons you can print in this environment are the best you're going to see ... even though spreads are wide, underlying yields are low so it's quite advantageous for the corporations to tap the market," he said.
Peters also said he expects to see continued volatility in the Treasury market, and excess volatility and the backup in rates could be challenging for an economic recovery. "The exit strategy around all of these (government) programs is tricky. Investors have it wrong if they think the worst is behind us in terms of volatility," he said.