Europe's debt woes threaten to sour markets again Thursday.
As this week progresses, Europe is increasingly serving as a counter weight to a growing stream of better U.S. economic news. It's no coincidence that European auctions of French and Spanish bonds top the list of what traders are watching Thursday, after a week where yields on French, Italian, Spanish and other European sovereign debt continued to rise.
The important data Thursday is weekly jobless claims at 8:30 a.m. EST, and the Philadelphia Fed survey at 10 a.m. Housing starts are also reported at 8:30 a.m. The Treasury also sells $11 billion in 10-year TIPS Thursday. Wednesday's data was all better than expected. Consumer prices fellfor the first time in four months. Industrial production was up 0.7 percent, its largest gain since July, and the National Association of Home Builders sentiment rose to its highest level in 18 months.
In U.S. markets, the benchmark Treasury yield has been hugging both sides of 2 percent, fluctuating between a safe haven trade and the reaction to improved economic reports. Traders were monitoring swap spreads Wednesday, as the 2-year swap spread tested 50 basis points, a level last seen in 2010. The U.S. 2-year swap spread is the difference between the 2-year swap rate and 2-year Treasury yield, and it's viewed as a measure of credit risk. The spread widened by 3.25 bps Wednesday.
"Financial conditions are strained but nowhere near crisis levels that we'd seen even earlier this year," said Robert Sinche, global currency strategist at RBS. "We had greater strains earlier this year and no where near the extremes of late 2008."
"There are headwinds. There are challenges here... The U.S. data is definitely looking better. You have this dichotomy of financial conditions getting strained and economic conditions getting better. The question everyone is trying to deal with is do the harder financial conditions short circuit any improvement in economic conditions. The jury is out because the financial conditions strain is not that serious."
Sinche also noted the time of year is part of the story. "It's not a surprise. We're coming up the year end and there's going to be financing pressures like there always is," he said.
Stocks Wednesday took a late day tumble after a warning about potential bank contagion from Europe rattled investors. The Dow was down 190 or 1.6 percent to 11,905, and the S&P 500 fell 1.7 percent to 1236.
Fitch, in a note released in the final hour of trading, said unless the euro zone debt crisis is resolved in a timely and orderly manner, the credit outlook for the U.S. banking industry could worsen. It said banks have manageable direct exposure to stressed European markets but further contagion risks exist.
Peter Boockvar, market strategist at Miller Tabak, said the market also reacted to reports from Washington on hang ups in the Congressional "super committee," which is fast approaching its Nov. 23 deadline to find $1.5 trillion in deficit reductions over a 10-year period. Wall Street expectations are low that the committee will be able to agree to the full amount of required reductions. If the bi-partisan panel fails, automatic cuts kick in.
There are a few earnings to watch Thursday, including Sears Holdings, Ahold, Buckle, Ross Stores, J.M. Smucker and GameStop, before the opening bell. Gap, Foot Locker and Salesforce.com report after the close.
Earnings to Watch
Delphi Automotive also starts trading Thursday, after pricing Wednesday at $22, the low end of its range. Angie's List priced at $13, the top of its range.
Oil Trade Reversed
A popular oil trade reversed course Wednesday after Canadian Enbridge said it was buying a 50 percent stake in the Seaway pipeline and would literally reverse the course of oil flow in the pipeline. West Texas Intermediate prices jumped, as traders bet the glut of Midwest oil would end, and WTI would now be priced closer to Brent, the international bench mark.
Enbridge is paying $1.15 billion for ConcoPhillip's 50 percent stake in the Seaway Crude Pipeline System. Enbridge will reverse the course of the crude and now take it from Cushing, Okla, a major storage hub to the Gulf Coast refining market.
"There was a very large hedge fund unwind of the Brent-WTI spread," said John Kilduff, analyst with Again Capital. "I think the Seaway pipeline changed the dynamic, and the trade fell out of favor in a remarkably swift fashion." WTI jumped 3.2 percent to $102.59, its highest close since May 31. Brent, at the same time fell slightly, off $0.30 to $111.88 per barrel.
"Before this morning, the Cushing, Okla. oil supply glut looked to be persistent. This unclogs the drain on getting a lot of that oil out to the market place, " Kilduff said. "Eventually, it should make the price cheaper. WTI is being valued higher in the market place, but ultimately its availability could cheapen all oil prices. You couple that with a significant return of Libyan oil and Iraq oil increasing, then supply problems should be alleviated for a time."
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