Update 1:05 p.m.:

Update 10:10 a.m.:

Whether it was all the happy talk on CNBC or just the high-frequency traders returning to business as usual, the stock market turned around and made it safely into positive territory.  The Dow is now higher by 54 points.  Trading is light but resembles a typical day prior to last week's events.  So much for volatility.

Bond traders were concerned about the possible lack of demand for the Treasury's new 3-year auction, but that concern proved to be unwarranted.  The auction went well with a large number of bidders and big foreign demand.  Despite this successful auction, bond prices are lower on the day as equities continue to rally.  The 2-year is .87%, the 5-year 2.29%, and the 10-year is down 9/32s to yield 3.57%.  
 
Update 7:50 a.m.:

Stocks have traded rather quietly after the early selloff and then rebound.  The Dow is currently down only 33 points and the euro remains above 1.27.  But if the boys and girls at CNBC have anything to say about, the stock market will trade higher.  CNBC typically has far more bullish guests than bearish guests.  Since Wall Street players are the usual guests, it's no surprise there are more bulls available for comment.  But today they are off the charts on bullishness.  CNBC is trotting out all of the most bullish of the bulls.  To hear the chatter on TV you would think that it's a layup that stocks will do nothing but trade constantly higher.  The talking heads have already relegated the Europe story to yesterday's news.  Who knows?  Maybe they will be right.

Bond prices are back to unchanged on the day.  The 2-year is .86%, the 5-year 2.25%, and the 10-year is unchanged at 3.54%.

Update 7:00 a.m.:

The Dow did open down 100 points as futures trading had indicated, but the index has quickly rebounded.  As mentioned below, it appeared that traders would revert back to watching the euro.  Before the open the euro was 1.269 vs. the dollar.  The euro has now bounced to 1.275, and the Dow has obediently rebounded to -41 points.  Traders have nothing else to do today but watch the euro.  There are no statistics and normal investors are absent.  This leaves traders to go back to playing the euro game. 

With the rebound in stocks bond prices have lost most of the early gains.  The 2-year is .85%, the 5-year 2.24%, and the 10-year is higher by only 4/32s to yield 3.53%.  Dealers are very wary of these upcoming auctions.  The last 3-year auction came at 1.78%.  The current yield on the 3-year is down to 1.34%.  Investor demand at this low level is uncertain.

Morning Comment:

After yesterday’s big global rally, we’re seeing some giveback today.  Global stock indexes, especially in Europe, are down sharply this morning.  (The Chinese stock market is at a new 12-month low and down 21% since November) This isn’t a big surprise.  After the past two weeks most investors had to have lost confidence and were looking for the exits.  Additionally, the big EU package really says nothing about how the debt will ultimately be repaid.  The EU put in place a package that met any liquidity future concerns but did nothing to address the root problem of bad debt.  I commented on this in the Longer-term Commentary I posted yesterday.  The EU package merely ensures that the mountain of bad debt will continue to exist for a longer period of time.  Only the ultimate holders and guarantors of the debt might change if the ECB ends up having to buy the debt. 

In yesterday’s rally the markets seemed to ignore the fact that the euro’s big rally to 1.31 vs. the dollar had faded to 1.285 by the end of the day.  That’s getting more attention today as the euro has fallen further and is trading just below 1.27. 

Dow futures are down almost 100 points in pre-opening trading.  The NASDAQ and S&P futures are both down over 1%.  The opening could be a big messy, but it looks like the markets are back into a more volatile state.  There are no economic statistics today. 

Bond prices are higher to start the day.  The 2-year is .83%, the 5-year 2.21%, and the 10-year is higher by 12/32s to yield 3.50%.  The Treasury will auction a new 3-year note today. 

The SEC held a meeting yesterday with the heads of all the various exchanges.  At the end of the meeting, a spokesperson said they could find nothing that went wrong or at least that the exchanges did that could have triggered the meltdown last Thursday.  Gee… I guess everything worked really well.  That’s good to know.  Head for the hills!!  The SEC did say the exchanges would begin to work together to change and unify some of the rules regarding what would trigger stops or brakes in trading.  Of course missing in those meetings were the heads of those “dark pool” and/or “high frequency” trading firms.  Since they generate 60-70% of the volume, I would think their input would be invaluable.  The exchanges have allowed this trading to grow and avoided any changes that might “limit” or upset those big trading operations.  The heads of exchanges enjoyed the revenue generated by the traders – no questions asked.  Now the questions are being asked. 

I’ll be back with updates.  I would guess we might watch the euro today.  If the euro rebounds from the lows this morning, stocks should firm up.

Dwight Johnston