Update 1:05 p.m.:

After several days of wild swings in the market, there was only one swing today.  The market shot higher after the open and then slowly built on those gains during the day.  The Dow closed at the days high of + 285, but forty points of the gain came in the last three minutes of trading.  Speculative traders with big computers seem to be back in charge again. 

The only reason for the rally was the denial by the Chinese of the story that they might sell euro assets.  That's not much a reason to rally by 285 points.  It was more likely a case that the market had been basically on the defensive for a few weeks, and traders decided to push from the other side.  

Depending on what happens overnight, I'm sure stock traders would like to close the month on a positive note.  There is little chance the market can recover all of the losses so far in May, but after today they can make a serious dent in the red ink.  

We'll get Personal Income and the Chicago ISM manufacturing index tomorrow, but no one will care.  I thought that the market might care just a little bit about this morning's Weekly Jobless Claims, but I was wrong.  Economics doesn't mean a thing. 

Bonds had the first really serious setback in many weeks.  The 2-year closed at .87%, the 5-year 2.18%, and the 10-year lost 1&12/32s to yield 3.35%.  The 30-year bond got smacked for 2&3/4 points to yield 4.25%. 
 
Update 9:10 a.m.:

The stock market has been quiet since the opening, but there are no sellers around - only computers with buy commands.  The Dow is up 210 points at this time, just below the day's high of +226.  Volume has died off since the opening round of short-covering.  The euro has continued to rebound.  The euro is 1.237 vs. the dollar. Currency dealers say traders are scrambling to cover shorts against the euro. 

Bond prices remain sharply lower.  The 2-year is .87%, the 5-year 2.17%, and the 10-year is down over a point to yield 3.32%.

Update 7:30 a.m.:

Stocks opened up strongly as futures trading had indicated.  The Dow shot to +184 and held steady in a narrow range of +150 to +180.  In the last few minutes, the Dow has pushed outside that range and is now +200 points.  This is purely a traders market, and they are all on the buy side.  Or, more accurately, those computer programs are stuck on the "buy" command. 

Bond prices continue to tumble as stocks push higher.  The 2-year is .88%, the 5-year 2.17%, and the 10-year is down over a point to yield 3.33%.  The 30-year bond is higher by over two full points to yield 4.21%.  The Treasury has a new 7-year auction later this morning.  The results could be interesting in this environment. 

Morning Comment:

Stocks fell 200 points from the high yesterday to close down 69 points.  This was based on a story that China was considering the sale of euro bonds and euros.  This was my take that I wrote in the closing comment.  “In the past couple of years, these China-might-sell rumors have almost exclusively been aimed at the possible sale of U.S. bonds.  None of these rumors ever came to fruition.  This one regarding the euro won’t either.  Without a doubt China might be reviewing its holdings and are rightly concerned, but this doesn’t mean they will sell.  The worst this might mean is that China might reduce future purchases.  They have billions to spend every month in various foreign currencies.”  The Chinese are in a box.  They simply can’t afford to sell any major positions in any major currency.  Everyone should know this by now, but traders still fall for the story every time.

The Chinese wasted no time disputing this story.  A Chinese official said the story was “groundless” and China remained “committed” to investing in Europe.  He’s got that right.  They are committed.  They couldn’t get out if they wanted to.  Based on this, the euro gained some ground overnight, and stocks rebounded.  Dow futures are higher by 190 points in pre-opening trading.  But, as you know, how the market opens doesn’t mean a thing about how it closes.  It’s just a big, sloppy mess of a market right now. 

Several big name investors, like Barton Biggs, are out this morning saying the market is ready for a big rally after being “oversold” for weeks.  They don’t bother saying the market was “overbought” for months, but the “oversold” term seems to be theme today.  If so, you can expect the bond market, which has been “overbought” for weeks, to continue to correct.  The 2-year is opening at .85%, the 5-year 2.13%, and the 10-year is now down 23/32s to yield 3.27%.  The 30-year bond is down 1&9/32s to yield 4.17%. 

We do have economic news today.  The first revision to 1^st quarter GDP has been released and GDP was revised from 3.2% to 3.0%.  Economists had guessed GDP would be revised to +3.4%.  That’s certainly lower than expected but it’s not significant.  This is old news, and the number is still 3%.  What I think is more significant is that Weekly Jobless Claims fell from 474k to 460k.  But this isn’t good news.  Claims were expected to fall further and should be averaging 440k or well below if the job market is truly improving.  Instead the 4-week average has moved higher to 456,500. 

The markets didn’t react to this news, but perhaps this might put a lid on things today.  I’ll be back with updates.

Dwight Johnston