Update 1:05 p.m.:

Update 12:00 p.m.:

The massive intervention in the currency markets mentioned below has caused a short-covering squeeze on the euro.  The euro is now 1.26 vs. the dollar and above a very precarious level vs. the yen. The central bank intervention has nothing to do with where the euro should trade.  Those central banks are in fear that the huge global leveraged trade is on the verge of blowing up.  For a more complete explanation of this, please go back and read my February Longer-term Commentary. 

The Dow has continued to recover somewhat, but there isn't a good feeling around.  Traders are clearly afraid that the central banks won't be able to stop the avalanche heading toward them. The Dow recovered back to -170 but is now down 234 points.

Bond prices have peeled back from the highs as bond trades cash in on some big profits.  The 2-year is .73%, the 5-year 2.02%, and the 10-year is higher by 30/32s to yield 3.26%. 
 
Update 10:35 a.m.:

The Dow hit a low of -356 points earlier but has rallied to -250.  Why?  Intervention and rumors.  Although the euro was relatively stable above 1.23, that wasn't enough for the central banks.  Apparently they decided to make a statement and have come in with guns blazing to intervene in the currency trade.  They were more concerned about the euro/yen, but the euro/dollar exchange is also in play.  Our Fed was supposedly part of the effort as well. What they are seeing is that leveraged traders who borrowed in dollars and yen to invest in euro denominated assets are getting blown out of trades due to currency losses.  This is what is forcing selling in all assets.  Those leveraged players have to sell anything they can to cover losses.   The euro is now almost 1.25 vs. the dollar.  I don't know when these officials will figure out that intervention won't really help calm the fears, but it is obviously not going to be today.

There are also rumors of an emergency European Union meeting or G-7 meeting (take your pick) that will happen overnight.  I don't know what possible good any meeting would do.  Every time one of these meetings has occurred, the expected results have been overturned by the market. Still, a rally could still develop from these rumors. 

It's worth noting that the price of oil has traded below $65 a barrel this morning.  About a month ago, the price was $87 a barrel with chatter about $120 being the next level.  Looks like the experts were half right on that one. 

Bond prices have stabilized.  The 2-year is .72%, the 5-year 2.01%, and the 10-year is now up over a point to yield 3.24%.

Update 9:35 a.m.:

The Dow struggled to recover back to -200, but the effort to move higher fizzled.  The Dow is now down 296 points.  Volume was very heavy early but has declined recently.  While bullish traders continue to insist this is a minor correction and should be bought, we're hearing more doubters out there than usual. 

Bond prices are scoring new highs on the day.  The 2-year is .70%, the 5-year 1.98%, and the 10-year is higher by 1&10/32s to yield 3.22%.  The 30-year bond is higher by 2&19/32s.  Dealers say there are big money managers who have been under-invested who are trying to get back into the game.

Update 7:55 a.m.:

The equity freefall stopped when the Dow hit -312 (see below).  Buyers aren't exactly flocking back in; let's just say they are tiptoeing into the stock market.  The Dow is now down only 240 points.  The talking heads on CNBC aren't dissuaded though.  They declare this a great buying opportunity.  You first.

Bond prices are off the highs but up very big on the day.  The 2-year is .72%, the 5-year 2.01%, and the 10-year is higher by over a point to yield 3.24%.

Update 7:20 a.m.:

The stock market is trading even worse than indicated by Dow futures (see below).  The Dow was down 200 points within a few minutes of the open.  The index did seem to be coming back (-160) for a short period, but sellers weren't through.  The Dow is now down 312 points.  

Bond prices continue to surge with heavy volumes flowing in.  The 2-year is .71%, the 5-year 1.99%, and the 10-year is up 1&8/32s to yield 3.22%.  The 30-year bond is up 2&19/32s to yield 4.09%.  But not all treasury securities are higher in price.  TIPs, the inflation indexed bonds, hit the skids a few days ago and are continuing lower.  While the 30-year bond is up well over two points today, the 30-year TIP is down 1&3/8s points.  The spread between the two has been in a freefall for a few days.  It's clear that some very big investors who were playing for the inflation scenario to kick in have changed course.

Morning Comment:

Traders in Europe are up in arms this morning on stories that the rest of the European Union might adopt the short-selling regulations Germany announced on Tuesday.  This comes just one day after they said they would not follow Germany.  These are unconfirmed reports though.  In Germany, rather than being deterred by the market’s reaction to the short-covering ban, officials are saying more stringent regulations are coming as the markets are “out of control.”  The market may very well be out of control there, but the behavior is being driven by a government that is making it up as they go along. 

In France, there are stories the government will impose a three-year spending freeze, which would be fiscally positive but economically negative.  Additionally, the EU finance minister indicated he was okay with the weaker euro.  He should be.  It’s good for exports.  But, the markets don’t like to hear that talk.  The euro is down but not sharply.  The euro closed over 1.24 yesterday and is 1.233 this morning. 

Stock indexes in Europe are down 2.0-3.0% to start the day.  This has triggered Dow futures to trade down 165 points.  Yesterday the S&P bounced from 1100 to close at 1116.  Chartheads trumpeted this bounce from 1100 as a strong “buy” signal.  Looks like the market will get yet another opportunity to bounce from this level.  But, this is a volatile market driven by outside forces (Europe), and we’re just along for the ride.  I don’t like this ride.

While everything is all about Europe today, we did just get Weekly Jobless Claims and this won’t help.  Claims were expected to fall to 435-440k from 444k.  Instead, claims jumped to 471k.  Usually the BLS has a ready excuse a surprising jump, but the BLS said there were no unusual or seasonal factors at play.  This is just a one-week number, but this is something to watch.  

Bond prices are, of course, sharply higher to start the day.  The 2-year is .72%, the 5-year 2.03%, and the 10-year is higher by 30/32s to yield 3.26%.  The 30-year is up 2&08/32s to yield 4.11%.   

Clearly, this is not a very good start to the day.  But it’s not where you start, it’s where you finish.  I’ll be back with updates.

Dwight Johnston