Update 1:05 p.m.:

After spending the day trading very quietly in modestly lower territory, stocks sold off in the last hour of trading.  The Dow closed down 127 points.  That takes care of last Friday's rally.  There was nothing driving the trade other than some late minor weakness in the euro.  It was likely more of a case of those infamous trading accounts playing computer games.  

Bond traders opted to ignore the late weakness in stocks.  The 2-year ended at .74%, the 5-year 2.01%, and the 10-year gained 5/32s on the day to yield 3.22%. 

The Case-Shiller Home Price Index will be released tomorrow, as will Consumer Confidence.  But, the market is unlikely to care about those.  We'll be watching for how Europe opens tomorrow.  That seems to be the game these days. 
   
Update 10:00 a.m.:

There were some rapid swings in the market earlier, but those swings were in a relatively narrow range.  Since then, the markets have been very quiet.  The Dow managed to make a brief appearance in positive territory (+16) and is now down only 10 points.  The NASDAQ is higher on some recommendations to buy Google and Apple. There's a shocker.  The euro has bounced back from the early low of 1.236 to 1.241.  That is what has lifted stocks generally. 

Bond prices are holding onto very small gains now.  The 2-year is .76%, the 5-year 2.00%, and the 10-year is higher by 8/32s to yield 3.21%. 

Update 7:10 a.m.:

In the short thirty minutes or so of posting the Morning Comment, the markets turned around to some degree.  Dow futures were down 70 before the open, but the Dow opened lower by only 30 points.  This was solely due to European stocks.  Stocks there were down sharply earlier but u-turned into positive territory.  But just as it seemed the markets would continue to rebound, sellers returned and sent the Dow to -96 points.  The Dow is now down only 50 points.  So, it seems like volatility will continue to be the order of the day but maybe in a narrower range.  The euro is still down on the day but has bounced off of the lows.  

Existing Home Sales for April rose by 7.6%.  This was above the lowball consensus of +5.6%.  Given that Exisitng Home Sales are recorded only at closing, we should see at least one big up month in sales from the home tax credit.   
 
Early bond gains have been pared back. The 2-year is .74%, the 5-year 1.98%, and the 10-year is higher by 9/32s to yield 3.20%.

Morning Comment:

The last 20 minute rally on Friday did prove to be nothing more than some option-related buying as opposed to a sign the market had turned.  This morning Dow futures are down about 70 points in pre-opening trading.  The motive is again the euro.  The euro closed near 1.26 vs. the dollar Friday and is trading at 1.237 this morning.  A major Spanish regional banking institution was effectively seized by the government over the weekend.  I say “effectively” because the banking system there is very different from ours and the structure and regulations are not the same.  This could be the first of many failures in Spain’s banking segment. 

Despite the drop in treasury rates so far this month, Bloomberg is reporting that corporate debt is having its worst month in a decade as spreads lurch out.  Across the credit curve spreads have widened.  The most notable sectors are high yield and financials, but the widening of spreads has hit all sectors.  Also note what is happening in lending spreads between banks.  One month ago, three-month LIBOR was about .24% and was set today at .51%.  The 2-year swap spread was .15% and is now .46%.  This is telling us that banks are getting less trustful of each other.  It’s certainly not a crisis yet, but this is a big move in a short time. 

While the focus and concerns are now on Europe and how the financial crisis there could impact the U.S., the National Assoc. of Business Economists (NABE) has just released a positive economic outlook for the U.S. economy.  This group of economists sees over 3% growth this year and next in GDP.  They also see strong job growth and tame inflation.  Sounds good to me.  That’s what the current data does seem to be telling us, but sometimes events out of our control impact us the most.  The subprime crisis here became the mortgage crisis, which resulted in the global financial meltdown.  The Greek crisis is no longer just the Greek crisis.  It’s now the European debt crisis.  We have to hope it stops there.  Should it become the next global financial meltdown, the NABE’s upbeat outlook can be tossed aside.

Bond prices are higher to start the day.  The 2-year is .73%, the 5-year 1.96%, and the 10-year is higher by ½ point to yield 3.18%.     

This week’s economic calendar is mostly about housing.  We’ll get Exiting Home Sales for April at 7:00 a.m.  Obviously, there will be a huge jump.  The Wall Street consensus of 5.6% increase is an obvious lowball estimate.  It should be much higher.  The Case-Shiller Home Price Index comes out tomorrow, along with Consumer Confidence.  New Home Sales will be released on Wednesday. 

I’ll be back with updates, but it looks like another day of following the euro.

Dwight Johnston