Santelli told me he believes the dollar marks the third big transition for the financial markets. First, he says stocks built a low around the Bear Stearns bail out, and then the bond market signaled that a bottom for rates is now in. "Now today, it is my personal belief the dollar's lows are in. It doesn't mean it's going to go straight up, but the dollar lows are in," said Santelli, adding it looks like $1.6018 per euro set on Tuesday could be the low.
"It's an overall feeling that the credit markets have shown us the worst punches they can throw at us. The fixing part is still going to take time, but we've seen the darkest it can be and it's going to start to clear up," Santelli said.
The dollar Thursday gained 1.37 percent against the euro to $1.5677, its highest closing level since April 3. It gained 0.86 percent against the yen. At the same time, those red hot commodities, which have been moving opposite to the dollar, cooled down a bit as the dollar rose.
Gold tumbled $19.40 per troy ounce to $886.80. Oil, meanwhile, fell $2.24 per barrel, or 1.9 percent to settle at $116.06.
Santelli said the commodities sell off could continue as the dollar strengthens. "I think gold is a good example. It's been driven by the weak dollar. I think in corn and wheat and soybeans, you have to be careful. They are going to correct, but there's still fundamentals there."
This trend is important for Friday's markets, and important as we look ahead to the Fed's two-day meeting next week. It's not surprising that a major driver of the dollar was a front page Wall Street Journal story Thursday by reporter Greg Ip that suggested the Fed could be finished cutting, after another quarter point cut. Not a new view, but the pre-Fed Journal always carries weight with markets.
In fact CNBC's Steve Liesman has been reporting the same for days. And BMO Capital's Andrew Busch had this in a note last Friday: "The markets are still pricing in a 25 basis point cut by the Federal Reserve on April 30th, but after that there is nothing more expected." (In fact, Busch also told me Friday that the dollar was close to troughing)
So it's not a new idea, but the story created new momentum, and if the Fed indeed follows the script, the end result could be a stronger dollar.
For stocks, "We'll have to see if this dollar rally has legs and more important see if the sell off in bonds is going to accelerate further," said Art Cashin, UBS director of floor operations. Cashin said it will be important to see how much weight the Fed puts on the idea of fighting inflation in the comments accompanying its rate decision next Wednesday afternoon.
In Thursday trading, the 10-year fell 25/32, and is yielding 3.827 percent, its highest yield since late February. The two-year went to a yield of 2.403 percent, its highest yield since Jan. 17. The Dow was swept sharply higher with financials in the afternoon but gave back gains in the final hour, to close 85 higher at 12,848. The Nasdaq was up 23.71, or 1 percent, to 2428, and the S&P 500 was up 8.89 points, or 0.6 percent to 1388.82.
Cashin, in an interview from the NYSE, said the Wall Street Journal story got the dollar moving Thursday, and the dollar's rally sparked a sell off in commodities, but the stock market really took off after Merrill Lynch CEO John Thain said Merrill does not intend to cut its dividend. "The Merrill dividend thing sparked a big rally in the financials. A couple of things got together," he said. Financials finished up 3.8 percent.
Cashin said the Thain comment was even more positive than what's been heard from other Wall Street CEOs, who have been saying the credit problems are in late innings. Whether right or wrong, the market took this comment to mean "we're in the bottom of the ninth with two outs," said Cashin.
Some earnings news from late Thursday will likely hang over the market Friday morning. In particular, Microsoft's disappointing earnings news dented its stock price in the after hours session. Microsoft reported a decline in third quarter profit as expected but its revenues were a bit softer. On a conference call, CFO Chris Liddell reiterated that the company was considering launching a hostile bid if Yahoo does not begin talks soon.
American Express , meanwhile, rose after reporting better-than expected profits of $991 million or $0.85 per share, six percent below last year's level. American Express reported revenues rose 11 percent to $7.2 billion. The company forecast per share earnings growth of 4 to 6 percent if the U.S. economy does not significantly deteriorate.
One important piece of data is released Friday morning, and that is consumer sentiment at 10 a.m., important as the consumer has been a source of particular worry for markets.
On the calendar Friday are far fewer earnings reports than we've been seeing. Goodyear and ITT both report, as does Energy and Ericsson.
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