Really?

Page One Archive

Last Update: 05-Oct-11 09:00 ET

Really?

Well, that was some close yesterday. The S&P 500 surged 4.0% in the last 40 minutes alone on a massive short-covering rally that followed headlines EU finance ministers are looking into a bank recapitalization plan.

It is necessary to point out that nothing concrete has actually happened yet, but these guys really mean it this time. Really, they do. We're not kidding. They really, really, really, really mean it -- or so the market wanted to believe.

Time will tell. It always does.

The sweeping response to the mere idea of a recapitalization program, however, made it apparent that headline risk can cut both ways like a knife. That is the essence of a market driven by macro concerns and where the tide of sentiment shifts on a whim on the belief that the latest headline suggests either nothing or everything has been solved.

Actions will speak louder than words. They always do.

On a related European note, Moody's downgraded Italy's debt from Aa2 to A2 after yesterday's close and punctuated the revision with a negative outlook. This headline was digested reasonably well as it was not seen by participants as a real surprise knowing that Italy was under review and given financial market dynamics during the review period.

European bourses have in fact kept a positive disposition today, gaining between 1.0% and 3.0% on the optimism surrounding the possibility that a recapitalization plan will come to fruition and an unchecked banking crisis can be averted.

The strength in Europe has not carried over to the U.S. The S&P futures are up one point and are trading 0.3% below fair value, which suggests the cash market will start the day slightly lower.

Notably, the S&P futures faded from their morning highs after the ADP Employment Change report estimated 91,000 private sector jobs were created in September, with the service-providing sector accounting for all but 1,000 of those jobs. In turn, small businesses (+60,000) and medium businesses (+36,000) carried the job creation load.

The September ADP number was well above the Briefing.com consensus estimate of 45,000 and in-line with the 89,000 jobs the report said were created in August.

That last thought may be the real sticking point considering the nonfarm payrolls report subsequently showed only 17,000 private sector jobs were created in August. Presently, the nonfarm payrolls report for September is expected to show an increase of 83,000.

Either way, participants are cognizant that the addition of 91,000 private sector jobs is not enough to bring down the unemployment rate in a meaningful way. As an aside, the ADP number does not include the striking Verizon workers who returned to payrolls in September, so it can be argued that it is a more hopeful indication than the headline suggests.

The latter thought notwithstanding, participants appear to be inclined to wait for the government's employment report on Friday before making any final determinations.

That is a fair position. Really, it is.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.