12/14/2011
By Carlos Guillen, Research Analyst

The increasing equity market sensitivity has continued so far into today's trading session, mainly as a result of Italian debt spiking higher and as a result of China's lack of conviction that it will ease liquidity to spur growth in the region. While we can blame yesterday's market fall on the Fed's failure to provide quantitative easing, we theorize that today this is playing a minor role in the market's action. We continue to maintain our belief that investors are overly sensitive to any form of negative news, no matter how miniscule, with a clear bias to the downside. And of course, European news is the main culprit for this over sensitivity as one day positive news comes out of the region and the next day negative news comes out. Signs of European contagion and Chinese weakness also have commodity prices down today particularly gold. All this has the stock market down today, with the Dow Jones Industrial Average in the red close to one percent.

Continuing on our over sensitivity argument, particularly to European events, the market began on a bad note after Italy auctioned 3 billion euros of 5-year notes at an average yield of 6.47 percent, increasing from the 6.29 percent in the prior auction and reaching a euro era record high. Italy's 10-year note yield also rose 6.70 percent from the 5.80 percent reached week ago and from the 6.45 percent reached just before the end of the EU Summit back on December 9. Investors were clearly spooked once again by Italy's interest rate increase, a day after a better-than-expected auction of short-term Spanish debt served to lifting equities during early trading yesterday. Again, investors are amplifying any basis point change to European bond rates, with more tendencies to the downside.

News from China was also not welcomed with opened arms today despite the fact that the nation pledged to guarantee growth in the face of an extremely grim outlook for the global economy in 2012, making a series of commitments to deliver economic stability. Chinese monetary policy makers promised to keep monetary policy prudent, fiscal policy pro-active, and consumer prices stable. However, investors were hoping for more than just words, such as outright monetary easing to spark growth. This disappointment has contributed to today's equity market decline as investors are sensitive.

Carlos Guillen
Wall Street Strategies