EmailThe S&P 500 has surged 11.0% in two weeks on the belief that European leaders are going to craft a solution to the sovereign debt crisis that prevents a broader banking crisis. The rhetoric from officials in the position to do something has been hopeful, yet it has lacked the specific detail and unanimous agreement necessary to be altogether convincing.
Finance leaders at the G20 meeting over the weekend, however, laid down the gauntlet: the debt crisis must be solved in one week (or something like that).
Apparently, the finance folk have set October 23 as the unofficial deadline for European leaders to have a comprehensive framework in place that will serve as the action plan for solving the sovereign debt crisis. Germany, which calls the shots in the EU, has subsequently moved to temper that expectation, saying effectively, "Nicht bekommen, ihre Erwartungen zu hoch."
In other words, "don't get your hopes up." Germany has said the grand solution is not a week away. Importantly, though, Germany didn't say either that there will not be a solution.
Germany's move to dampen expectations on timing has taken some steam out of the futures trade this morning, as well as some steam out of European bourses which were trading notably higher earlier in the day.
The S&P futures, up as many as 11 points in overnight action, are now down three points and are trading 0.3% below fair value. That should translate into a slightly lower open for the cash market, which has been seemingly unimpressed with the earnings reports from Citigroup (C) and Wells Fargo (WFC), and the Empire State Manufacturing report for October, which showed little improvement from September (-8.48 vs -8.82 prior).
Given the move the market has made over the last two weeks, it is reasonable to expect some profit taking. To be fair, a 0.3% slide at the open doesn't exactly connote a whole lot of concern that the plan for fixing Europe's financial problems is going to be wrecked. It could be still, but right now the market is still affording officials there the benefit of the doubt.
At the same time, participants are also cognizant that this is a huge week of earnings reporting, as well as a busy week of economic reporting that will continue today with the Industrial Production report for September (Briefing.com consensus +0.2%; prior +0.2%) at 9:15 a.m. ET.
With that backdrop, it is natural at this juncture to have a bit of a wait-and-see attitude.
--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.
