While it has been a relatively quiet morning in terms of news, there has been considerable volatility this morning with the major averages starting the day trading back and forth around the flat line before weakening considerably to their current levels at session lows (Dow -189, SPX -24, Nasdaq -30). While there is little newsflow contributing to today's action, there are a few items of note that we wanted to provide some additional color on: 1) Yesterday's afternoon rally: The S&P 500 gained ~26 pts (~3.9%) in the final hour of trading yesterday, leaving the index up about 1.0% at the end of the day. There has been some talk this morning suggesting the rally was in part related to mechanical buying caused by the replacement of BUD by SRCL in the index, following the close of BUD's acquisition by InBev. This would make sense since the BUD buyout was a cash deal, so index funds would redistribute cash received from the buyout back into SRCL and other S&P 500 components.
With BUD being a much larger co ($70 bln mkt cap) than SRCL ($5 bln mkt cap), a good portion of the cash would flow into other index components since the S&P 500 is a mkt cap weighted index. While yesterday wasn't necessarily a big deviation from recent short-squeezes that have taken place around these levels, the afternoon rebound after testing recent lows would typically be viewed as a positive. However, this idea of a partially "mechanical rally" may have led some to discount the significance of yesterday's late day rebound... 2) REIT weakness: REITs are showing aggressive declines this morning (URE -11.5%, IYR -6.5%), with the weakness stemming from concerns about the CMBS market. A Stifel analyst this morning noted that any REITs are having a harder time getting credit and rolling over debt at reasonable rates, due to liquidity problems in the CMBS market.
The weakness in the REIT space is also spilling over into the broader financial sector (XLF -5.8%, KRE -3.1%)... 3) Early dollar weakness: The US Dollar saw a quick move lower against the euro and yen around 9:10 ET this morning (USD/Yen , USD/Euro ). While there isn't a clear consensus on the fundamental reason for the move, we'd note that Fed Vice Chairman was speaking on monetary policy at the time and said the risk of deflation is still small. Some may also attribute the move to the decline in CPI, but it's safe to say inflation wasn't considered to be an obstacle to further rate cuts prior to today's data, so the thinking that a heightened possibility for further rate cuts wouldn't be a likely driver. This is led to moderate gains in dollar-denominated metals and commodities, but the dollar has since retraced the majority of its early losses, leading to a similar turnaround in the dollar denominated metals/commodities.
The stock market opened modestly lower after digesting a batch of economic news before the open. The move lower was small and the market quickly reversed higher, which was also a short-lived move as major equity indices quickly pulled back to opening levels and continued to extended further to the downside. About 30 minutes into trading , the market attempted to rally again, but the second rally attempt only lasted ~15 minutes, before falling sharply down to session lows, which were hit around 12:20ET. Back to the econ news that was released before the bell, October Core CPI, CPI, Housing Starts, and Building Permit data were released at 8:30 ET.
The pricing indicators all came in lower than consensus expectations, on both a year-over-year and month-over-month basis. Overall, the data shows broad weakness that reflects sluggish economic demand. Housing Starts actually beat expectations (791K vs. 780K), but Building Permits came in well below consensus (708K vs. 774K), indicating continued weakness for housing starts in the months ahead. Mid-morning, at about 10:35 ET, the Department of Energy released its inventory data, which showed larger than expected builds in crude (1599K vs. 1000K cons.) and gasoline (539K vs. unchanged cons.). However, the initial reaction in Dec crude oil ($54.69 +0.30) was minimal, moving up modestly after the release, before eventually dipping into the red. Also, throughout the morning, upper management of the "Big 3" automakers has been testifying before the Financial Services Committee, attempting to make their case for government financial aid as a lack of a bailout may lead to General Motors (GM, -15.5%) and Ford (F, -22.6%) declaring bankruptcy.
The financial sector is also under extreme pressure today, after Citigroup (C, -12%) announced before the open that it is liquidating its Corporate Special Opportunities hedge fund after it lost 53% of its value last month. The company also announced that in a nearly cashless transaction, it has committed to acquire the remaining assets of the SIVs at their current fair value, estimated to be approximately $17.4 bln, net of cash, as compared to $21.5 bln at Sept 30, 2008. Dow is currently -163 to ~8261; Nasdaq is currently -48 to ~1435; S&P is currently -25 to ~834... From a technical perspective, The major averages remain under selling pressure moving through midday although price has put in a slight countertrend move off the lows & trying to stabilize here. The SPX has formed a broad double bottom pattern seen on the intra day 5 min. chart with today's low connected very closely with yesterday afternoon lows. This pattern bears watching. Should it hold it could lift price in afternoon trading, whereas is the bulls fail to protect this key support level surrounding 830/825 it could leave the door open for a retest of current 2008 lows @ 818. Market internals remain weak with NASDAQ TRIN above the 3.50 level indicating extreme selling pressure in that complex. Decliners outpace advancers by better than 7:1 on the NYSE...
The Bond mkt pushed higher in overnight trading, but reversed course sharply lower at the open of pit trading as equity futures were indicating a higher open. The bond market turned around even harder around 9:40ET, moving beyond its morning high, leaving the 10-yr trading near today's highs. The 10-yr is currently +1-07/32 3.386%... In Europe, mkts fell sharply, dragged down by banks and commodity shares that slipped on persistent worries that a global economic downturn would lower demand for crude oil and metals. FTSE closed -4.8%; DAX closed -4.9%; CAC closed -4.0%, RTS +0.7%...
Note in Asia, the Nikkei closed -0.7%, the Hang Seng closed -0.8% and the Shanghai Composite closed +6.1%... On the Earnings calendar, 11 cos are confirmed to report today after the close. Tomorrow before the open, 25 cos are confirmed to report... On the Economic calendar, nothing remains on the schedule for today. Tomorrow before the open, Initial Claims figures are scheduled to be released at 8:30ET.