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.