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6/7/2012 1:58 PM
No QE3, but Stocks Still Pop
By WSS Research Team
No QE3, but Stocks Still Pop
By Carlos Guillen
Equity markets are responding quite well so far during today's trading session, despite the fact that there have been no signs of any quantitative easing anytime soon. It is apparent that Ben has done a good job in giving markets the confidence it needs to support stocks today; however, there have been other forces assisting equities as well. Initial Claims data improved week-to-week. China is finally making clear moves to improve liquidity, lowering interest rates. Also German chancellor Merkel said Germany is ready to back the use of existing Euro-area instruments. And let's not forget that Spain today had a successful sale of 10-year bonds. All of these forces are coming together to lift markets today.
Initial Claims data posted earlier today finally made a turn for the better, as the result showed a decreasing number of Americans filing for jobless benefits. According to the Labor Department, initial claims during the week ended June 2 totaled 377,000, decreasing from the 389,000 revised figure reported for the prior week, but landing above the Street's estimate of 375,000. Initial claims numbers had been ramping higher, but now it appears that the number of firings made a sudden decline, clearly giving investors a momentary sigh of relief, particularly in light of the dismal jobs numbers posted this past Friday. While there are very few signs that the employment backdrop will improve anytime soon, investors can find some solace in anything that indicates that at least the situation is not getting worse. Given that at the moment the only support for economic growth rests on consumer spending, everyone will be keenly focused on the employment situation.
While the Initial Claims data provided some support for markets today, the Fed's comments were likely a more significant force. However, Ben Bernanke offered no hints about further Fed stimulus; nonetheless, markets have gained confidence that the Fed stands ready to act if need be. Moreover, investors are still speculating that the Fed could extend Operation Twist or launch a third round of asset purchases known as quantitative easing.
Perhaps the most significant force acting on equity markets today was the news that China will cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe's worsening debt crisis threatens global growth. China's one-year deposit rate will drop to 3.25 percent from 3.5 percent effective tomorrow. In addition, China delayed tightening bank capital rules to the beginning of next year, providing support for loan growth in an attempt to accelerate growth in the region.
Over in the euro region, Spain slightly assuaged concerns about its ability to borrow after two days ago a senior government official said Spain's access to debt markets was closed. Spain's Treasury was able to beat its 2 billion-euro target at a bond sale, selling its benchmark 10-year bond at a yield of 6.04 percent, the most since November 17 when the yield in the secondary market reached a euro-era record 6.78 percent; but it was good enough to calm investors.
All in all, the sum of the forces has been strong enough to lift the Dow Jones Industrial Average 125 points, or close to one percent. While the upward moves in equities are encouraging, we are still cautious as we still expect lots of volatility to come from Europe. Stocks at the moment appear to be heavily dependent on systemic factors rather than on company fundamentals, and with the political backdrop heating up here at home, anything is possible.
By David Urani
Sometimes it's tough to be the most powerful person in the world; I'm talking about Bernanke who at least for today held the world's attention, with many looking for some kind of fiscal easing. What Ben said today is essentially that the Fed is not acting right now. There simply isn't enough evidence that employment is headed downward (one disappointing jobs report isn't enough to suggest a downtrend), or that deflation is on the way (oil still at $85), thus the Fed isn't obligated to change its policy. He gets a lot of flak from the media but today I think he deserves some props for making the right call. It's not his job right now, it's up to the EU to get their act together and come up with a solution, and if the US wants to alleviate any economic woes then it is the congress and the White House that should act first.
The market naturally followed Ben's comments with an intraday dollar boost (although it's still slightly down on the day), and an ensuing selloff in gold (-3%), silver (-3.4%) and oil (down to $85 from $87 intraday) among others. But I say the market is being too quick to boost the dollar and sell commodities today. I think that in the near term the bias for the dollar will continue to be to the downside. It is Europe that's going to go into action well before the Fed/USA. But, as per ECB chief Draghi's comments on Wednesday they aren't in a position to be printing money, either. That means the next move is going to be a euro zone effort, and it's going to be one that facilitates euro unity, as echoed by Merkel today. A few options include money injection into Spain's banks, a unified banking system, and eurobonds.
Whatever they choose, it's likely to be supportive of the euro, and that means the relative value of the dollar will fall. Whether or not said plan actually works in the long term is a whole other issue and one would be wise to be skeptical. However, look for this immediate-term rise in the dollar, and slide in gold and oil, to reverse itself as the market anticipates the next move by the EU.
Intraday Gold, Oil
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