Update 1:05 p.m.:
After trading quietly most of the midday hours, the Dow sunk to -110 with an hour to go in trading. This was of course due to the euro declining from 1.29 back toward 1.28. The euro’s fall was arrested in the last hour, and the Dow closed down only 60 points after some very late buying by traders.
Bond prices settled higher on the day but well off the early levels. The 2-year closed at .87%, the 5-year 2.30%, and the 10-year gained 13/32s to yield 3.54%. Dealers reported very heavy institutional buying early today in the mad scramble to add to bond positions.
Tomorrow’s only economic news that matters is the Weekly Jobless Claims report. Claims are expected to fall by about 10k to 440k. Some economists believe a bigger decline might occur. But the market won’t be paying much attention to any economic news. The day will start tomorrow with an announcement following the regularly scheduled European Central Bank meeting. The ECB is expected to announce that they will provide funding to banks that hold the debt of Greece and the other weak sisters at full face value for the bonds. Technically, with the recent downgrades, the ECB should either not accept those bonds as collateral or take them only at market value less a big margin haircut. The ECB is expected to suspend those rules. Just one more example of pushing the problems off until later. The ECB might also have some other moves in store as it appears the European economy will suffer a setback due to the debt crisis.
If the markets get everything they are hoping for, we should see a relief rally in the euro and in stocks. The next hurdle will be on Friday when the German Parliament is scheduled to vote and likely approve the Greek bailout – against the wishes of the populace. But it appears that officials feel they have no choice. If Greece is allowed to default, German banks will suffer big losses. This is a classic case of there being no good choice or right answer. There is more pain to come regardless of the path chosen.
Update 10:00 a.m.:
After a volatile first hour, the markets have calmed considerably as the euro has remained stable. The Dow is currently down 22 points after venturing briefly into positive territory.
Bond prices remain up on the day but well off the highs in the early buying frenzy. The 2-year is .88%, the 5-year 2.31%, and the 10-year is higher by 9/32s to yield 3.56%.
Update 7:50 a.m.:
The markets continue to recover from the early selloff as the euro continues to improve vs. the dollar. The euro has climbed from an early morning low of 1.278 to 1.288. The Dow is now down only six points. Also pushing stocks higher are the talking heads on CNBC screaming "Buying opportunity!" There's a surprise.
Bond prices are also off sharply from the highs as the panic buying has subsided. The 2-year is .89%, the 5-year 2.32%, and the 10-year is now higher by only 9/32s to yield 3.56%.
Update 7:00 a.m.:
The Dow opened down 100 points, and there was another surge in treasury buying. But conditions have calmed down a bit. The Dow is now down only 50 points. This came after yet another EU official pled the case for Germany's approval to kick in their share for the Greek bailout. Germany's Parliamentlary vote on Friday is seen as critical. The public polls in Germany are strongly opposed, but the EU official believes that Germany must and will approve the plan. This pressure from the EU official has temporarily stopped the euro plunge. The euro briefly traded below 1.28 but is now back safely above 1.28. European stock indexes are still down but off the lows. It looks like traders will be following the euro today.
There was another surge in bond buying, but that has abated. Still, prices are sharply higher. The 2-year note yield is down to .86%, the 5-year 2.28%, and the 10-year is higher by 20/32s to yield 3.52%.
Morning Comment:
That’s not fair. The markets finally get really interesting on the two days I was out. Of course there could be more interesting days ahead as the Greece crisis showing no signs of abating. Protests turned violent today in Greece, and there are no signs that the Greek population is ready to accept the austerity forced on them by the bailout agreement. They don’t have an alternative plan, but they know they don’t like this one. One senior official of the ECB went as far to admit this Greek could crisis could be the beginning of the end for the euro. I would imagine he will be forced to retract this statement, but the wheels are in motion for many more months of turmoil in the European zone. Don’t forget that, as a block, the European Union is our biggest export buyer. A weakened economy there and a weakened exchange rate are not good for our export business or our companies that operate in Europe and have significant currency exposure. This isn’t just about Greek bonds.
The euro has sunk to just below 1.29 vs. the dollar, and dealers are reporting that investors are showing signs of panic to get money out of the euro. The euro/dollar exchange peaked a few months ago around 1.52.
Despite the further turmoil, the markets aren’t reacting as violently as was the case yesterday. European indexes are all down but only by roughly 1-2% at this point. Dow futures are trading lower by roughly 60 points.
The ADP employment report came in as expected with a 32k gain projected in private payrolls. This service does not include government workers. The 32k gain, while in line, tells us that private job creation is still sluggish at best. This will not change the consensus for the headline number on Friday’s Nonfarm Payrolls. The consensus remains for up 200k, but even +300k would not be a surprise if the census hiring kicks in. The ex-census worker count is what matters most though.
The bond market is continuing to benefit from the flight out of the euro. The 2-year is .89%, the 5-year 2.31%, and the 10-year is higher by 13/32s to yield 3.55%. The 30-year bond is higher by 24/32s to yield 4.37%. One month ago the 10-year note closed at 4.01%, and bond bears were looking for a breakout to higher yields. While there was universal bullishness for stocks, there was universal bearishness for bonds. Survey after survey showed that bond managers were short their normal duration bogeys, and all were waiting for higher rates. What we’re seeing now is many of those bond managers in full panic to buy to close the maturity gap.
I’ll be back with updates. I’m not looking for a repeat of yesterday, but there should be some volatility at least.
Dwight Johnston
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