Update 1:05 p.m.:

The economic calendar is light tomorrow.  We’ll get the 2^nd revision of 1^st quarter GDP, which is totally irrelevant at this point.  We’ll also get the latest consumer sentiment reading from the University of Michigan.  This is normally the point at which I tell you that nothing really matters but where the euro opens – but not today.  The euro rallied and was a non-factor.  One day does not a trend make, but I would like to believe those trading computer programs are de-coupling from the euro.

Update 11:00 a.m.:

As mentioned below in the 10:10 a.m., it looks like there is some bargain hunting going on in stocks and some profit taking in bonds.  The Dow is now down only 40 points.  The 2-year is .68%, the 5-year 1.96%, and the 10-year is now down 6/32s to yield 3.14%.  We'll see if this holds through the close.  The euro is holding steady near the highs, but it isn't getting much attention today. 

Update 10:10 a.m.:

Stocks have completely ignored the euro today - a very welcome relief in my book.  When the euro surged to its high today of 1.237, the Dow was hitting its low of -134.  In the last hour or so, some traders (and maybe a few investors) started to bargain hunt, and the Dow is now down only(?) 85 points.

The Treasury's 7-year note auction went well.  Demand was solid in all categories despite the low yield of 2.57%.  But the bond rally has fizzled for the time being.  After such a good run, it wouldn't be surprising to see some profit-taking.  The 2-year is .66%, the 5-year 1.93%, and the 10-year is higher by only 7/32s to yield 3.10%.

Update 8:12 a.m.:

The euro remains above 1.23, but the Dow is now down 123 points after a minor recovery to -60.  I think it's safe to say that traders aren't watching the euro today at least.  The selling seems to be coming mostly from speculative traders, but some selling is the result of recent retail sales data from the big retailers.  June sales are not looking good.  Retail stocks have been in decline since late April, and the magnitude of decline is now threatening some long-term charts.  There is also selling in financials as the financial regulation bill continues evolve. 

The 2-year is .65%, the 5-year 1.91%, and the 10-year is higher by 12/32s to yield 3.08%.  It looks like the bond rally has stalled out as dealers get ready for the 7-year note auction.

Update 7:00 a.m.:

While the euro/stock link might not be broken, it has certainly loosened in early trading this morning.  Ahead of the opening, the euro continued to rally and broke above 1.23.  The opened down only 20 or so points but quickly fell further.  The Dow is now down 95 points despite the euro continuing to hold above 1.23.  There is no news driving trading, but it seems traders are getting more concerned that the market is facing a setback instead of a recovery.

Bond prices remain higher.  The 2-year is .65%, the 5-year 1.91%, and the 10-year is higher by 12/32s to yield 3.08%.

Morning Comment:

In very early pre-opening trading Dow futures were lower by 75 points.  This was before the Weekly Jobless Claims number.  The euro was lower to start the day but not significantly so.  Stocks in Europe were lower as Greek debt spreads, among others, widened and more articles appeared regarding possible default and re-structuring as the only long-range solution.

Weekly Jobless Claims have now been released and claims fell from an upwardly revised 476k to 457k.  This was in line with expectations but still far above what would make us all more comfortable that private jobs were being added.  Dow futures did manage to rally back to -50 on the release of claims.  At least I thought that was it until I glanced at the euro.  The euro popped back up from 1.226 to 1.229.  Perhaps that mattered more.  Durable Goods Orders being down 1.1% was as expected.  This volatile series rarely matters on a month-to-month basis.     

Bond prices are higher again today but already down from the very early highs.   The 2-year is now .65%.  That note actually hit .62% earlier.  The 5-year is 1.91%, and the 10-year is higher by 10/32s to yield 3.09%.  The 30-year bond yield is 4.05%, after hitting 4.02% very early.  Dealers would like to see prices fall this morning ahead of the Treasury’s 7-year note auction.  Yesterday’s 5-year auction was very weak, but afternoon market action bailed out the buyers.  Dealers don’t want to risk having to rely on a bailout rally today.  Bonds will probably follow stocks today. 

Bullish stock traders and pundits have to be worried about that outlook given the way the market has traded this week.  There was a failed rally on Monday, a sharp selloff below the 200-day moving average Tuesday, and no rebound on the FOMC statement yesterday.  Additionally, the wiggles higher in the euro, when they occur, are still drawing stocks higher but those rallies are not holding.  Stock traders will need a couple of days in a row of high-volume, convincing rallies to get the bull express back on track. 

The USA Today has an article today on IRS audits of those claiming the home tax credit.  They are disallowing thousands of claims based on the fact the homes weren’t purchased in the allotted time frame.  Those might have been due to misunderstandings and some were likely due to hopes the IRS wouldn’t notice the time frame.  But they are also finding more ingenious examples of fraud.  So far they have uncovered 1,295 prison inmates who filed for the tax credit. I guess they thought any new home qualified.  I wonder if Bernie Madoff was one filing for the credit.  The IRS also is finding that some homes have multiple claims using the same home.  In a case in Florida, the IRS found 67 different tax payers had filed for the credit listing the very same home.  Genius. 

I’ll be back with updates.

Dwight Johnston