Against the backdrop of anti-austerity protests in Athens and Madrid, Europe has regained its ranking as a top concern for markets.
Europe will be back in the driver’s seat Thursday, as Spain introduces a budget, expected to contain reforms and new taxes. Traders are watching the reaction – in both the markets and the streets.
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The focus will also be on U.S. economic news, including weekly jobless claims, durable goods and the final look at second quarter GDP, all at 8:30 a.m. ET. Pending home sales are also released at 10 a.m. The Treasury auctions $29 billion in 7-year notes at 1 p.m.
Treasury yields Wednesday continued to decline for an eighth session, as buyers moved money into the bond market and away from stocks and other risk assets. The 10-year yield touched 1.61 percent, its lowest level since Sept. 5.
Stocks fell, with the Dow losing 44 points to 13,413, for a total four-day decline of 1.4 percent. The Dow is up 4.1 percent for the quarter, while the S&P 500 is up 5.2 percent for the third quarter. The S&P lost 8 points Wednesday to 1433, with energy the worst performing industry group.
Oil Wednesday continued to tumble, for a near 10 percent decline in less than two weeks. West Texas Intermediate lost 1.5 percent to $89.98 on weak U.S. demand data.
“It’s a continuing stroll to safety, rather than a flight,” said Art Cashin, director of floor operations at UBS.
Gina Martin Adams, institutional equities strategist at Wells Fargo Securities, said the market is giving up some of the anticipatory gains, made on the promise of Fed and European Central Bank easing. “In terms of the market activity, we’re definitely seeing rotation into more defensive sectors, and a little rotation out of the cyclicals that have run on the concept of central bank easing,” she said.
“From that perspective you are seeing a flight to quality, or maybe just a reduction of optimism,” she said.
Nomura Americas Treasury strategist George Goncalves said the markets were primed for the Fed easing and initially moved on the idea that the Fed’s new open-ended program to buy mortgage securities was bigger than past QE programs. “The initial knee jerk reaction both in risk markets and bond markets was this was a bigger program, and QE was going to turn the tide, but what we’re seeing as we head into the end of the quarter is that a lot of this was priced in,” he said.
He said investors were “whipsawed” in the third quarter, and quickly had to reposition in the summer when European Central Bank President Mario Draghi declared the ECB would do what it takes to defend the euro. “There was a massive short covering rally and on top of that a QE rally,” he said. So now, money is leaving equities and other inflated risk assets, as investors adjust portfolios ahead of the fourth quarter.
“Money is pouring into Treasurys. It doesn’t mean it’s going to last,” Goncalves said.
As Treasury prices rose, the dollar gained ground against the euro, which reached 1.2871 late Wednesday.
The euro, at that level has reached a level of support, said Boris Schlossberg, director of BK Asset Management. “It’s really going to depend on what happens in the streets,” said Schlossberg. “We’re right back to watching credit markets because credit market stress begets currency stress. It’s very definitely a yellow light right now, as far as risk goes.” Spanish bond yields crossed above 6 percent again Wednesday.
“The demonstrations in the street are only accelerating that dynamic. The yields are going up again,” said Schlossberg.
The VIX, the CBOE’s volatility index, made a fairly dramatic move Wednesday. Viewed as a measure of market fear, the VIX jumped 9 percent to 16.81.
“I think we got to the point where investors were very complacent with the idea that central banks would help risk assets,” Adams said. “Once we got past the central banks news…it was ‘Okay, what’s next?’ and the ‘what’s next’ was a lot more of the same in terms of economic data.”
“Investors are rightly looking at earnings season and thinking things are not going to be particularly rosy this time around,” she said.
There are several key earnings reports Thursday, including Discover Financial and McCormick, ahead of the market open. Research in Motion, Nike, Accenture and Micron report after the bell.
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