Update 1:05 p.m.:

The euro traded from a low of 1.2238 to a high of 1.2405.  The close was 1.239 thanks to some late short-coverning.  The Dow traded in a range of a low of -184 to a high of +45 and closed up 6 points.  The machines have fully taken over, and frankly these aren't even smart machines.  The entire day was one of the Dow slavishly following every tick of the euro.  Investors, or real people, don't do that.  Machines do.  The talking heads on CNBC will try to trumpet today's rebound from the low as a great sign that investors recognized value and "bought the dips,"  but they are lying - or should I say elasticizing. It's a mindless game right now. 

Tomorrow nothing will really matter but the euro.  However, we should get a nice jump in Housing Starts.  The Producer Price Index will also be released, but no one will care.  Stocks will rally tomorrow as long as the euro trades and stays above 1.24.  A better-than-expected Housing Starts number might help, but that is only if the euro cooperates.   

Bond prices fell into the losing category as stocks rebounded.  The 2-year ended at .80%, the 5-year 2.19%, and the 10-year lost 6/32s to yield 3.48%. 

I mentioned commodity prices below.  Despite the weaker dollar, commodity prices remained near the lows of the day.  That could be very telling about what true demand might be.
  
Update 10:15 a.m.:

After the swoon in the euro took the Dow down to a low of -174, the euro managed to claw back above 1.23 and the Dow is now down 135 points. 

It's worth noting what has happened to the commodities markets of late.  The price of oil peaked a month ago at $87 a barrel, and it has traded below $70 this morning.  The CRB index, the basket of all commodities, peaked at 293 in January and is now 253.  Some of this is certainly the result of a stronger dollar, but some key commodities like lumber and copper could be reflecting slumping demand.  

The 2-year is .78%, the 5-year 2.14%, and the 10-year is higher by 7/32s to yield 3.42%.  

I'll be back with updates.  The next one is likely to be that stocks are coming back because the euro is rallying.  The only other choice would be that stocks are falling again because the euro is tumbling.  There are no other choices. 
 
Update 9:00 a.m.:

Here we go again.  The euro, which rallied back above 1.24, plunged back below 1.23.  That's all it took for the Dow to fall by 160 points.  I'm not hearing that volume is heavy, but it's clear that buyers are not following the "buy the dips" strategy.

The 2-year is .76%, the 5-year 2.11%, and the 10-year is now higher by 15/32s to yield 3.40%.  The 30-year bond is up a point to yield 4.29%.

Update 7:10 a.m.:

It's going to be another one of those days.  Stock traders are merely following the currency trade.  The Dow was up 40 points early as the euro bounced all the way back to 1.2404.  That was based on the rumored intervention and on speculative traders taking profits on short positions against the euro.  The Dow then sank to -40 as the euro fell back below 1.24.  It is currently stable at 1.2378.  The Dow is now down 21 points.  The euro game is the only one being played.

The bond market remains quiet.  The 2-year is .79%, the 5-year 2.16%, and the 10-year remains up 2/32s to yield 3.46%.

Morning Comment:

In Asia overnight, the euro sank toward 1.22 vs. the dollar.  Asian stock markets fell and the Dow futures traded to -110 points.  But, as Europe woke up, the euro rallied back to Friday’s levels after rumored intervention by European and Swiss central banks turned the tide temporarily.  ECB President Trichet also said that the European Union needed a “quantum leap” in policy to deal with the crisis.  For some reason traders are taking this to believe that Trichet has some ideas to propose, although he offered none.  It’s clear that Europe is in trouble and that trouble will lead back to the banks there and ultimately around the globe.   If he has some ideas, he had better get busy and put them out there.  These occasion forays into the currency market by the central banks won’t work over time. 

Dow futures are now higher by 13 points as European indexes are all higher.  Bond prices are unchanged to slightly higher.  The 2-year is .78%, the 5-year 2.16%, and the 10-year is up 2/32s to yield 3.45%.

Not that it matters, but we do have some economic news this week.  Housing Starts are expected to be higher tomorrow when reported.  Builders had good sales as the home tax credit expired last month, and they have some inventory re-stocking to do.  In yesterday’s paper, there was a report that building activity is really coming back in Las Vegas, Phoenix and other hard hit areas.  It’s not that there aren’t still a lot of distressed homes on the market; it seems that people just don’t want to buy in those vacant neighborhoods nor try to deal with banks for foreclosures and short sales.  One new home buyer had just given up a yearlong effort of trying to buy distressed homes after a series of attempted negotiations with banks met with stonewalling.  He said, “I don’t think banks really want to sell those homes.”  The easy path is to just buy new.  Builders are also focusing on smaller, cheaper homes.  Of course putting more homes on the market is not good for the long-term, but it does mean construction jobs in the short-term. 

The FOMC minutes from the April meeting will be released Wednesday.  Earlier that day, CPI will be released.  Inflation is still irrelevant, but you should watch what happens to the year-over-year rate for Core CPI.  That number is down to 1.1% and will likely slip to 1% or slightly below. 

Of course, until further notice, nothing matters but the euro.  I’ll be back with updates.

Dwight Johnston