Markets in the past week reacted to mixed messages on the economy from spotty U.S. data, and a quick run up in European sovereign yields. The dollar index lost 1.7 percent, as the euro rallied hard against the greenback, gaining 3 percent.
Stocks bounced back Friday after several volatile days of selling that hit Nasdaq and small caps hard. The S&P 500 was down 0.4 percent for the week, at 2,108, while the Nasdaq was down 1.7 percent at 5,005. The small-cap Russell 2000 lost more than 3 percent, and high fliers like the biotechs were among those groups that were burned, before bouncing back Friday.
"To me, it's a Federal Reserve risk-taking market. It's a market that's really pivoting on the Fed, which is certainly disturbing," said Jack Ablin, CIO at BMO Capital Markets. "This suggests to me that they really do need to normalize policy when you get really perverse market moves. Bad news is good news because it keeps the Fed off stage, and the longer the Fed is offstage, the longer the market invites risk taking. It's a risk taker's market."
The selloff and rebound in equities came against the backdrop of an odd bond market sell off that seemed to ignore normal triggers, like Wednesday's negative report Wednesday of scant 0.2 percent first-quarter growth. Bond yields moved higher, as prices decline.
"It's not because of the Fed. It's not the bond market realizing, 'Oh my God, the Fed is going to raise rates!,' " said George Goncalves, head of rates strategy at Nomura. "It's more that the market got too long on this concept that there weren't enough bonds out there. That got tested this week, and now that people are shaken up after this nonstop race to the bottom, the market is going to trade two ways."
Some stock strategists said rising yields were a factor that spooked the stock market, even though the 10-year is still at a relatively low 2.11 percent, compared to 1.91 percent the week earlier. The 10-year yield, now at a seven-week high, has been following Europe, particularly the German bund, which many traders assumed was heading toward negative yields. However, bund yields staged a fast reversal, and the 10-year rose to a high 0.386 percent, still relatively low but an eight-week high.
Traders have been talking about a shortage of bonds, particularly at the long end, as central banks around the world carry out quantitative easing bond purchases and because of new regulations affecting trading by banks. The European Central Bank's buying had been sending bond yields lower, making Treasurys more attractive as well.
"People basically stopped buying. They started looking around and saying, 'Why am I buying at these yield levels, and maybe there's a resolution in Greece … and maybe European data's getting better.' It definitely was driven by Europe," said Goncalves. He said a technical factor on how the ECB structured its bond buying that also affected the market.
Goncalves said he had expected a test of the ECB ability to hold down rates with QE, and it would show up first in bunds. Unlike the Fed, which bought different parts of the curve on a schedule, "the way the ECB program was designed, when everything is rallying it creates this massive rally in rates, but when there's a little bit of a hiccup, it creates a selloff," he said.
He said rates could stay in a range that would include slightly higher yields, but at about 2.17 on the 10-year, value investors could step in. "Everybody's beat up this week. It's not that far away from where we are now, but we definitely can explore these levels for three or four days heading into the nonfarm payrolls, and if the NFP is a rock star, then there's more room to go," Goncalves said.
As for equities, he said yields could start to be a problem if they continue to move higher, encouraging asset allocators to shift holdings because of it later in the month.
Besides the jobs report, there are a number of other reports, such as ISM nonmanufacturing and international trade Tuesday; ADP employment and productivity and costs Wednesday and weekly jobless claims Thursday. There is also Chinese data on trade on Thursday and inflation on Friday.
The stock market will be focused on another week of earnings reports, including Disney, Comcast, Archer Daniels Midland, Tesla, and MylanLabs. There are also drillers like Transocean, Pioneer Natural, Noble Energy, Diamond Offshore, Anadarko and Chesapeake, among others.
"I think it's going to be about Europe and Greece (this week). I'm amazed there's not more fear and foreboding about what's going on in Greece. There's a whistling past the graveyard. Everyone says there's going to be a deal. We haven't seen a deal," said Steven Massocca, managing director at Wedbush Securities. "Are those European bond markets going to continue to go down? The jobs number is about Friday and the week after."
Greece needs to repay a total of almost a billion euros to the IMF by May 6 and May 12.
Ablin said stocks could continue to be volatile as the market weighs each key economic report and what it means to the Fed. The market for now expects a rate hike by September at the earliest, and most likely by December.
"I think the trend is still higher. There's a ton of liquidity, and we're invited to take risk," he said. "So it's more of the same until we start to close in on September, or we start to see stronger economic results that suggest the Fed is going to move sooner."
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