A down day for the dollar is basically now an up day for everything else. That was Tuesday's trade, and it could be Wednesday's trade.
"It's the new normal," said Cowen head equities trader John O'Donoghue, half jokingly.
Stocks finished higher Tuesday after an early negative reaction to disappointing consumer confidence data, but the market's main move was more like a sideways drift. The Richmond Fed manufacturing survey also dropped into negative territory to its weakest reading since December, 2009.
The Dow was up 46 at 10,858, and the S&P 500 rose 5 to 1147. Bonds prices also rose, which sent the yields on the 3-year, 5-year, and 7-year to record lows. Gold also set a new record and was near $1311 in late trading. Some other commodities also finished higher, including silver, up 1 percent, and copper, up 1.1 percent.Oil finished slightly lower, down $0.34 per barrel at $76.18 per barrel.
The dollar though fell against the euro and yen. It was down 0.7 percent versus the euro, at $1.3578 and dollar/yen was at 83.96, close to a level where traders believe the Bank of Japan could intervene. The dollar rose, however, against sterling. Bank of England policy maker Adam Posen said the U.K. should move on its own quantitative easing.
"It's pretty much a dollar weakness kind of a day. What's interesting is it wasn't, I don't think, necessarily a risk on/risk off kind of a thing as much as it was general dollar weakness," said Robert Sinche, who joined RBS this week as head of global foreign exchange strategy.
"When you look at a day like today, it was a combination of this back and forth on the Fed and additional quantitative easing...and the data is on the soft side," he said. The Wall Street Journal Wednesday reported that the Fed is considering a more open ended, smaller program than its previous large scale QE program to buy Treasury securities.
"The QE mania still has a fire under it," said John Spinello, head of Treasury strategy at Jefferies. "The Fed doesn't know what they have to do and the market is leading on the side of them pricing in some action, whatever it is going to be."
Many economists expect the Fed to restart its QE program at its November meeting, and that expectation has been a negative for the dollar but has helped drive some commodities prices higher and put a floor under stocks. The theory is that QE would be a way to drive lending rates lower, at a time when the Fed's target Fed funds rate is already at zero. The Fed is also concerned about a lack of inflation and even a whiff of QE has already driven commodities prices higher.
"I think this whole issue of the Fed potentially exporting U.S. monetary policy does have a broadly positive impact on commodity prices," said Sinche.
At the same time, the upheaval in currency markets has set off reactions around the world. The Japanese and Swiss have confronted their rising currencies through intervention. The British have talked down sterling by talking up more quantitative easing of their own, and the Brazil's finance minister Guido Mantega this week said the world is involved in a "trade war and an exchange war."
The IMF's managing director Dominique Strauss-Kahn responded Tuesday by saying the risk of a currency war is low. But he did not rule it out and said the issue would be a topic at upcoming summits. The G-20 finance ministers and central bankers meet in Washington next week for IMF and World Bank meetings.
There was plenty of news circling the euro zone Tuesday that might have been negative for the euro on any other day. There was speculation of a Spanish ratings downgrade and more worry about Ireland's credit rating and bank problems. On Wednesday, general strikes take place in Italy, Portugal, Spain, and Latvia.
On Wednesday, European Central Bank officials attend the Eurofi Financial Forum in Brussels. German Bundesbank President Axel Weber is expected to speak.
There are also several Fed speakers Wednesday. Minneapolis Fed President Narayana Kocherlakota speaks at 10:15 a.m. in London on the FOMC. Philadelphia Fed President Charles Plosser speaks at 12:30 p.m. on the economic outlook, and Boston Fed President Eric Rosengren speaks at 1:15 p.m. in New York.
Traders are watching the Japanese quarterly Tankan business survey, which showed confidence at big manufacturers improving further in the third quarter. The U.S. does not get more data until Thursday, when weekly jobless claims and revisions to second quarter GDP are reported.
What Else to Watch
The Treasury auctions $29 billion in 7-year notes at 1 p.m. Wednesday, following the well-bid auction of $35 billion in 5-year notes Tuesday.
"On no news, the market will be well bid until Thursday," said Spinello, noting that the end of month is prompting some investors to buy duration because of index extensions.
O'Donoghue said as of now, there's no reason for stocks to stop their drift higher. He does not expect a double dip recession, and the market is already pricing in an election that changes the makeup of Congressm, with a Republican-run House.
"On a relative basis, to other instruments, they appear quite cheap, and there's no reason to buy them. There's no impetus right now to buy stocks, to have to own stocks, but relative to bonds, they're cheap," he said.
Companies to Watch
Family Dollar reports earnings Wednesday.
Investors will also be watching for reactions to news from Hewlett-Packard late Tuesday. HP shares rose after the company raised its earnings guidance.
Green Mountain Coffee shares were sharply lower after the company revealed the SEC is investigating its revenue recognition practices and relationship with a vendor, as it revealed a three-year old accounting error.
Reports on consumer confidence and home price data, and the Treasury's $35 billion auction of 5-year notes are events that will be watched by financial markets Tuesday, as investors count down to end of the third quarter.
Monday's trading was fairly quiet, with stocks slipping into the close and buyers driving Treasury prices higher. The Dow lost 48 points to 10,812 and the S&P 500 lost 6 to 1142. The 2-year was yielding 0.44 percent and the 10-year was at 2.521 percent. The auction of $36 billion in 2-year notes was well bid. Treasury auctions 7-year notes Wednesday.
Gold crossed the $1300 mark, before trading at $1,297.15 per ounce in late afternoon. Silver also moved higher, rising to a 30 year-high before sliding back to a high it set last week.
Bank stocks were the weakest group, down 1.2 percent, as markets continued to be concerned about the financial state of Ireland and Portugal. Moody's also downgraded Anglo Irish bank by three notches because it said the bank may require government help.
"The problems out of Europe are not ones to be discounted lightly," said George Goncalves, who head Treasury strategy for Nomura Americas. "...the bond market rallied but stocks were only off 6 points. There's a bigger thing going on. Yet the bond market continues to make lower, lows when they're already at the lows.
"Something else is going on. What's driving it? A lot of it is the idea that the Fed will be able to buy you out at a higher price," said Goncalves.
Goncalves said the indecision in markets will remain until the Fed decides what course it will take toward quantitative easing (QE); the outcome of mid-term elections are clear, and tax policy is more certain. "The next six weeks are critical for a lot of the different markets. The volumes are very low. People have little conviction of where we're going . In every market, people have little conviction. We need a catalyst to lift the curtain of uncertainty," he said.
The Fed's quantitative easing program, expected by Fed watchers in November, is likely to focus on the purchase of Treasury securities. The Fed has said it is worried about the economy and unemployment, and the lack of inflation.
The Treasury is issuing $100 billion in notes this week, and Tuesday's auction could be the most difficult, Goncalves said. "I think that today's auction is not indicative of tomorrow. Today was good because people are considering 2-year paper like cash in your wallet. We got into a very sticky spot. The 7-year will do better than the 5-year," he said. "..We're getting to the end of the quarter, people take down some of the risk."
He said big investors buying for indexes will use the 7-year over the 5-year.
The 5-year auction is at 1 p.m. S&P Case/Shiller home price data is reported at 9 a.m., and consumer confidence is is reported at 10 a.m. The Richmond Fed survey is released at 10 a.m.
October Trick or Treat?
September statistically has been the worst performing month for stocks, and many strategists had expected it to be painful. But now that September has outperformed, they've set their sights on October.
Of the half dozen times the S&P 500 gained more than 5 percent in the month of September, the market was mostly higher in October with an average gain of 1 percent, according to Birinyi Associates.
This September, the S&P 500 is up about 9 percent or so, its best performance since 1939's more than 11 percent gain.
There was only one year of the six that ended in a negative return, and that was 1939, when the S&P was down 5.2 percent. World War II was a likely factor that year. That October gained 0.3 percent, and in that September, the market was down 2.7 percent year-to-date. But in all other years with a strong September, the market ended with double digit gains for the year.
There were only two times that October performance was negative after a strong September. For instance in 1997, stocks were up 5.3 percent in September and had been up 28 percent for the year at that point. October was then down 3.5 percent, but the market ended the year with a 31 percent gain. In 1954, the S&P gained 8.3 percent in September, but lost about 2 percent in October. It had a gain that year of 26.7 percent. In the fourth quarter alone, it gained 20 percent.
Jeff Rubin of Birinyi also studied the performance of the market after rallies of the current duration - or 532 days - from the March, 2009 lows. He found four cases, and each time the market continued its move higher. Stocks are up 58 percent since March, 2009. "The take on this is because the market is overbought, over the next couple of days, weeks we could go sideways a bit. We still think there's a positive bias to the upside. For those saying the market is ahead of itself, we would say it is not," he said.
He said the market period that most closely aligns to the current one, started when stocks troughed in August, 1982. By the comparable time in the rally, stocks were up 60 percent. If history is a guide, "longer term the market goes sideways for the next couple of weeks, then continues its upward bias, going up the next year. There are certainly more labored gains going out, but not an end to the bull market, not a significant correction at all," he said.
The dollar edged higher against the euro Monday but slipped slightly against the yen. Dollar/yen was 84.22 in late New York trading. Theeuro was at $1.3471.
The dollar was at its lowest level against the yen since just after the Bank of Japan intervened to push it down Sept. 14, raising speculation the BOJ could return to the market.
Brown Brothers Harriman chief currency strategist Marc Chandler said the volatility has changed the balance in the foreign exchange market. "The point is the euro is more correlated to the stock market right now than the yen is, and we should expect that to continue. It seems the driver is not really risk on/risk off. it's really about interest rates. The Federal Reserve's adoption or the heightened anticipation of QE2 lowered U.S. interest rates, and it's undermining the dollar against the yen," he said.
He said the correlation between dollar/yen and the S&P 500 is about 33 percent, down from the 70 percent it had been at just a few months ago. "It's a not a good hedge any longer...some equities people embrace the currency because its led to diversity in non correlated assets," he said.
What Else to Watch
The circuit breaker system set up on individual stocks after the flash crash still has wrinkles. The stock of Progress Energy fell enough Monday to be halted on the NYSE, but dozens of trades still took place, albeit in milliseconds, after the circuit breaker was tripped. Many of those were at the Nasdaq.
In an interview with CNBC's Maria Bartiromo Monday evening, Securities and Exchange Chair Mary Schapiro said she hopes the SEC report on the May 6 flash crash will be released within the week.
Walgreen reports earnings before the bell Tuesday.
Hewlett-Packard holds a late afternoon analysts' meeting at its headquarters. The company had still not named a replacement for former CEO Mark Hurd.
Barnes and Noble and investor Ron Burkel, who has been waging war against the founding family, face off at the company's shareholder meeting at 9 a.m.
Atlanta Fed President Dennis Lockhart speaks at 5:30 p.m. in Sewanee, Tenn.
Stocks broke out of their summertime trading range, and the question now is whether the market can hold on to September's record-setting gains.
With the past week's 2.4 percent gain, the Dow Jones Industrial Average is now up 8.44 percent for the month and is on track for its best September since 1939. The Dow, at 10,860, is up 11.1 percent so far for the third quarter, which ends Thursday. The S&P 500, up 9.5 percent in September, closed above the tough, 1130 resistance level twice in the past week, a signal to some traders that the market may be set to trade in a new higher range. (Get Dow 30 quotes here.)
"Ultimately, the big deal is going to be whether the economic growth rate is really accelerating in the fourth quarter or whether it doesn't," said James Paulsen, chief strategist at Wells Capital Management. "In the short run, these technical levels matter. There's no way to get to 1200 unless you break through what's been the overhead resistance to the trading range since May."
"If I'm worried about anything I am worried a little about the earnings season, only because you had a weak quarter...I'm watching the GDP revisions leading up to the earnings reports. If people are revising down their growth, you generally get a disappointing earnings season. If they're revising up, that's a good sign," he said.
There is a smattering of data in the coming week, including ISM manufacturing data, consumer sentiment readings and monthly auto sales.
Economists are watching the personal consumption expenditure data on Friday, since it is a gauge the Fed looks at as a measure of inflation.
The Fed, in the past week, was the biggest driver of markets, after it promised it would move on quantitative easing, or QE, if the economy warrants it.
The dollar went into a tail spin, losing 3.4 percent against the euro and nearly 2 percent against the yen. For the week, Treasurys were slightly higher, with the 10-year yielding 2.610 percent.
Gold rose 1.6 percent to a record $1,296 per troy ounce, and silver jumped 2.9 percent to $21.38 per ounce, a 30-year high. Oil rose 2.1 percent to $76.49 per barrel as the Fed's comments sent buyers into commodities. Some economists believe the Fed will use its Nov. 3 meeting to announce QE, which would likely be the purchase of a significant amount of Treasury securities by the Fed in an effort to push lending rates even lower.
Some of the economic data also was a bit better than expected in the past week, including Friday's durable goods, which had been disappointing last month. "It was the report that hit forecasting the hardest. Now everybody's wiping their foreheads," said Credit Suisse economist Jonathan Basile.
Basile said the durable goods report, which showed a 1.3 percent decline in August, was actually better than expected because it showed core capital goods orders gained 4.1 percent. "Firms went from major destocking to a little restocking. Then they wet to understocked, to just about right," he said.
September's strong market performance was a surprise to many strategists who had expected the usually tough month to be turbulent on the downside. The question in the next week is whether fund managers will sell to capture their September and third quarter gains, or ride it out into October.
"Our target has been 1100 to 1140 (on the S&P), which would be a pretty flat market," said Scott Wren, of Wells Fargo Advisers. "I think you're in for a period of the stock market working its way higher but at a very modest pace. I think you're going to see a lot of volatility between now and the end of the year, but it wouldn't surprise me to see a pull back here. We're a little cautious in the near term."
Brian Dolan, strategist with Forex.com, said the final days of September could bring an even weaker dollar. (Get currency quotes here.)
"It's month-end. It's quarter-end, and it's going to get a little bit sloppy here. In terms of those kind of flows, in terms of the gains we've seen in U.S. shares, there's probably going to be a need for greater selling on the month end date. It'll probably lead up into that. Certainly the dollar is on its heels at the moment. It's not going to take much to push that," he said.
"We're at some major market levels...1150 in the S&P, $1.35 in the euro and it was $1,300 for gold. We need to surpass those levels to see further immediate gains. There is the risk of some consolidation in the next week," he said.
In the Treasury market, traders are watching the auction of $100 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.
The week's data includes the S&P/Case Shiller home price index and consumer confidence, both released on Tuesday. Thursday's numbers include revisions to second quarter GDP, the Chicago Purchase Managers' index and weekly jobless claims. Friday's reports include consumer spending, ISM manufacturing, and construction spending. There are also personal income and spending numbers and the core PCE deflator Friday.
Other events this week include the first meeting of the Financial Stability Oversight Committee on Friday. That group is headed by Treasury Secretary Tim Geithner, and includes Fed Chairman Ben Bernanke; Securities and Exchange Commission Chair Mary Schapiro; FDIC Chair Sheila Bair, and Commodities Futures Trading Commission Chairman Gary Gensler, among others. The FDIC also has an open board meeting Monday. Its agenda includes discussion of how, under new financial regulatory rules, a large financial firm could be liquidated if it is a risk to the system.
Bernanke also speaks on Thursday at a town hall meeting with educators in Washington. Other Fed speakers include Atlanta Fed president Dennis Lockhart on Tuesday' Minneapolis Fed President Narayana Kocherlakota; Philadelphia Fed President Charles Plosser, and Boston Fed President Eric Rosengren, all speak Wednesday. The New York Fed's William Dudley speaks Friday morning at a journalism conference, and Dallas Fed President Richard Fischer speaks Friday on the economy.
Dolan said he is also watching Chinese purchasing managers' data Wednesday and Friday and the August leading index early in the week. The Japanese Tankan survey is released on Wednesday. European finance ministers meet at the beginning and European Central Bank President Jean-Claude Trichet is expected to speak.
About $20 billion in investment grade corporate bonds were issued in the past week, bringing the monthly total to about $88.8 billion, according to Thomson Reuters IFR. For the quarter, about $217.4 billion has been issued and $535.2 billion for the year-to-date.
Another $20 billion is expected in the week ahead, according to Lisa Coleman, head of the investment grade corporate credit team at JPMorgan Asset Management.
Coleman pointed to an interesting trend in corporate credit. Investors are snapping up investment grade debt at a seemingly faster rate than it is coming to market. "If we had about $450-$460 billion, between maturities and tenders, net supply was looking more like $90 billion. Then if you had also taken into account what's going on with coupon flow, we're actually in a net negative supply situation for the U.S. this year," she said.
At the same time, corporate bonds have become a highly desirable asset class and have seen inflows of about $100 billion into investment grade this year.
"It means we have incredibly positive technicals. The supply demand picture is positive," Coleman said. She also said the weaker economy is not a problem for corporate bond investors.
"A slow growth environment is actually pretty good for investment grade corporates because it keeps them from doing things that are too shareholder friendly and that's what we want to see as bondholders. Most of these companies have room to increase their dividends and buy back some shares," she said.
She said the $4.75 billion 3-year issue from Microsoft this past week was interesting. "They issued at 25 basis points over Treasurys. The coupon is less than 1 percent. Here's the better part-not only did they issue at those levels but the bond spreads over Treasurys have tightened since the issuance," she said.
The Microsoft debt offer also highlights an interesting issue. The company has a huge cash hoard and like many other U.S. companies, it keeps cash expatriated because of high U.S. taxes. At the same time, it can easily tap the debt markets for extremely low cost capital. In Microsoft's case, it raised capital it planned to use to pay dividends.
Corporations have been looking for tax relief from the government to repatriate that cash, which totals more than $1 trillion.
What Else to Watch
Even as a number of tech companies warned about softer revenues, the Standard and Poor's tech sector was one of the best performing sectors in the past week, gaining 2.8 percent. Apple continued to set new highs in a move toward 300.
The latest challenger to i-Pad will be released Monday, when Research in Motion unveils its new tablet at a developers conference. RIM stock was up nearly 5 percent in the past week.
Hewlett-Packard , still in need of a CEO, holds a meeting with analysts Tuesday.
There are also a few earnings, including Jabil Circuit and Paychex Monday; Walgreen Tuesday.
Family Dollar reports Wednesday, while McCormick and Accenture report on Thursday.
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