By David Moenning
Chief Investment Strategist, StateoftheMarkets.com
Greetings from Kilkenney, Ireland.
For me at least, the weekend elections, as well as yesterday's market action, raise more questions than answers. While the bulls will argue that yesterday's impressive rebound in the U.S. indices means that the buyers are resilient at the present time and that we've seen the lows for this corrective phase, frankly I'm not so sure this is the case.
Believe me, as a card-carrying member of The-Glass-is-Always-at-Least-Half-Full club, it pains me to say this. But as the saying goes, one good day does not a trend make (or change). So, unless the bulls can put in a carbon copy of yesterday's resilient action, I'm guessing that that we will soon be looking at a case of deja vu all over again as far as Europe and the markets are concerned.
I know what you're thinking. Hasn't the market moved past Europe? Aren't we focused on the slow-but-steady economic growth and the earnings game here in the U.S.? And isn't our market still AAA (all about Apple - AAPL), Google (GOOG), Facebook, and the high fliers such as Chipotle (CMG)?
Up until April 3rd, I would agree that the market had moved on from the daily headlines and rumors out of Europe, and that BTE was the driving force here in the good ol' USofA. However, the purpose of my meandering missive is to identify the driving forces behind the market on a daily basis. And the bottom line here is that Europe appears to once again be large and in charge here.
Yesterday it seemed that the overall theme of the day was fairly straightforward: Austerity is under attack from the voters in both France and Greece; Greece (and perhaps Portugal) leaving the EU is back on the table; the Euro is headed down; and uncertainty is back.
Stock markets in Europe certainly confirmed the renewed concern about the outlook for the PIGIS as steep drops were seen at the open here. And in the wee hours of the pre-market futures session in New York, the S&P 500 futures were down 18 points. In short, it looked like it was going to be ugly.
However, the much anticipated breakdown in the Euro (FXE is a nice proxy for the currency if you don't have access to futures) didn't happen and neither did the anticipated -1.5% dive in U.S. stocks. Suddenly and without warning, the Euro improved, which caused European markets to move up from their opening levels, which caused U.S. futures to follow suit. The key question, of course, is why?
The fundamental thinking seems to be that although the Greece bailout is likely back in question and that France may soon be exposed to a ratings downgrade, there really isn't anything new here. After all, Greece has already effectively defaulted on the debt that was supposed to bring ruin to the global banking system. And then the idea that the Eurozone (as well as the Euro) may be better off in the long run without the likes of Greece and Portugal seemed to catch on.
Jim O’Neill, chairman of Goldman Sachs Asset Management, probably said it best yesterday in summing up the situation. “It may be the case that in the future, only those that can live with the stringency of the conditions required to keep the show on the road will be in the euro,” O'Neill said.
However, the other side of the coin is that the move in the Euro, which triggered the rebound in European and U.S. stock markets, may have been caused by short-covering. Don't forget that "buy the rumor, sell the news" (or in this case, "sell the rumor, buy the news") is still a viable strategy for those in the global macro community.
So, which is it, you ask? Was yesterday a one-day wonder with short-covering explaining the big bounces seen in Europe and the U.S.? Or are traders looking down the road a piece to a time when the weak links have left the Euro? Frankly, I'm not sure about the answer here as the current environment leaves me with far more questions than answers. Thus, the best way to play is to let the markets tell us what is important going forward. But unfortunately this may take more than a day or two.
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