EmailThe equity market staged a nice rebound rally off yesterday's lows to stem a losing streak that had reached seven sessions for the S&P 500 and eight sessions for the Dow Jones Industrial Average. So far this morning, however, that effort is proving all for naught as the S&P futures are trading 1.2% below fair value.
Strikingly, there isn't a clear-cut headline to explain the bearish disposition.
We have heard some rumblings that festering concerns about Europe's sovereign debt problems have catalyzed the selling interest. That is plausible considering the risk aversion trade is evident again, with Treasury yields dropping and gold prices rising. However, it is not a wholly sufficient explanation knowing that those concerns were in yesterday's mix, too, and yet the market rallied into the close.
Even more striking is that Spain had a better-than-feared debt auction; same-store sales for July were mostly better than expected; and General Motors (GM) topped earnings estimates by $0.35, yet there has still been a thud in the futures market.
In other developments, both the Bank of England and ECB held their key lending rates unchanged while Japan's Ministry of Finance intervened to weaken the yen (-3.5%) and the Bank of Japan increased its asset purchase program from 40 trillion yen to 50 trillion yen.
Kraft (KFT) beat earnings per share estimates by four cents, raised its guidance for FY11, and said it will split into two companies. Reportedly, you will now have to buy "Kraft Macaroni" in aisle 5 and the "& Cheese" in aisle 7. Kidding there. Kraft is going to create two independent public companies -- global snacks and North American grocery.
The futures market is having none of it.
There was a brief spike in the futures in the wake of the report that initial claims for the week ending July 30 dipped 1,000 to 400,000 (Briefing.com consensus 405,000), but selling soon picked up again. Continuing claims for the week ending July 23 were up 10,000 to 3.73 mln (Briefing.com consensus 3.700 mln).
We suspect the indication from ECB President Trichet that the central bank is going to extend the maturities of its lending program from one month to six months, which came shortly after the initial claims report, contributed to the renewed selling interest. That announcement is a nervous reminder for participants that risks to the outlook are still high.
In our estimation, "outlook" is the operative word this morning. Market participants, for various reasons, don't have much faith in the outlook right now and so they don't have much faith in earnings prospects.
That lack of confidence is why we suggested yesterday there will be an inclination to sell into strength as the burden of proof is on policymakers here and abroad to restore confidence in the outlook. So far, they have not been equal to the task.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
