As Fear Trade Unwinds, Unease Remains
Published: Thursday, 9 Aug 2012 | 5:27 PM ET
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By: Patti Domm
CNBC Executive News Editor
CNBC Executive News Editor
Markets have been shaking off the
worst of this summer’s fear trade, and now traders are looking for the next
catalyst that will break the August doldrums.
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“It kind of feels like the
Treasury market had a period of normalcy for one week. There was more supply to
take down, less buyers and rates actually went higher. A bit of normalcy was
introduced,” said Nomura Americas Treasury strategist George Goncalves. “The
question is, is it here to stay, given all these unresolved issues out of
Europe. It’s just like we had this window in time where auctions actually
mattered and we end a cheapening in the bond market. It may be too good to be
true. It may only last this week. It was kind of refreshing to see.”
Calm has taken hold in a low
volume bond market. For instance, the $16 billion 30-year bond auction saw light demand
Thursday, and a high yield of 2.825 percent, the highest level since late June.
After the auction, rates were at 2.75 percent, well above late July’s 2.45
percent low. The 10-year tested a late May high yield (explain this) of 1.73
percent Thursday, before trading back down to 1.69 percent, a big move up from
last week’s ranges and well above the July low of 1.38 percent.
The same market phenomena is
showing up in stocks, where a rising stock market has pitted the S&P
500 against the key 1400 level, a zone it was last at in May.
The index rose above the 1400 level Tuesday for the first time in three months,
finishing at 1401, but it has only managed to hold slightly above it. On
Thursday, it closed at 1402, gaining about a half a point on the day. Traders
say the S&P needs to break out meaningfully above 1400 to confirm the move.
Some commodities have also
returned to spring levels, with the Jefferies/Thomson Reuters CRB index of 17
commodities at a three-month high.
Analysts say last week’s promise
of possible action by both the European Central Bank (explain this) and
Federal Reserve (explain this) is behind the
market moves, and is supporting risk assets. But traders say just as quickly, a
negative headline could come from Europe and tip markets back into fear mode.
Traders also point to a myriad of
worries for stocks, beyond Europe. The list includes weaker U.S. and Chinese
growth; the uncertainty around the presidential election; the threat of the
fiscal cliff’s double whammy of new taxes and spending cuts on Jan. 1, and the
prospect of slowing corporate profits.
“The rally has gotten everybody
bewildered,” said Art Cashin, director of floor operations at UBS.
“But I think everybody right now —
bulls and bears — would like to tiptoe into the weekend and take another look
next week,” he added.
The end of the month Fed symposium
in Jackson Hole, Wyo., is the next big event that traders are watching. It was
there two years ago that Fed Chairman Ben Bernanke signaled a round of
quantitative easing (explain this), or Fed asset purchases. The
speculation is that he could do something similar this year, clearing the way
for the Fed to take action in September.
Comments last week from ECB
President Mario Draghi, promising action to defend the euro, also have markets
expecting some move from Europe’s central bank in the September period.
“It’s been quiet for the past few
days … It’s kind of the dog days of summer,” said Jeff Kleintop, chief
investment strategist at LPL Financial.
Kleintop said the calm is probably
temporary.
“I do think we’ll see some
volatility come back," he said. "It wouldn’t surprise me to see stocks move back
to the bottom of this channel we’ve been in. September is a big month for
declines, but August is a big month for volatility.”
As for Treasurys, Goncalves said
the auctions could have set the highs in yields for now.
“It might be tranquil into these
key events, at the end of August and into September, then we’ll reassess the
rest of the year,” he said, adding that Germany votes on the ESM bailout
mechanism and the ECB meets in early September. The Fed meets Sept. 12.
What to Watch
Friday’s markets have several
earnings and some data. Import prices are released at 8:30 a.m. EST, as is the
U.S. Department of Agriculture’s major crop report, which should give new
details on the state of the drought-stricken corn and soy bean crops. New corn
crop (December) futures closed at a record $8.23 a bushel Thursday.
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