For most of the last 3 months, major market averages have been stuck in gradual grind higher, that’s been mostly range bound, between the highs on the first trading day of March, and the lows less than 2 weeks later on March 11.
The S&P 500 at 2114.07 +0.2% as a benchmark, has posted higher lows on at least a half dozen occasions, while a breakout to new highs the 3rd week in March has so failed to gain momentum. Most recently, the closing ranges have converged even tighter as the last 4 sessions have all settled within 0.35%. There has been some intraday volatility during this stretch, with the buyers taking a stand at S&P 500 2100 and the sellers snuffing out rallies at 2120.
Other market averages have been similarly “stuck” in tight trading ranges, with the DJIA, at 18,076 +0.35% hugging its 50 day MA since the close last Friday, and NASDAQ, at 5099 +0.4% banging against 5100 resistance for a week, after last Wednesday’s record close of 5106.
While the lack of volatility and volume in equity markets has been great for coffee vendors in lower Manhattan, its left stock traders yearning for the action we’ve seen this week in the currency and bond markets.
Coming into the week, consensus was the US $$ was poised for another leg higher as rates in the Eurozone had pulled back from their sharp rally of the last 6 weeks and the US economy was showing more consistent signs of growth..
It couldn’t have been more wrong!!! Tuesday morning after data from the Eurozone showed their annualized inflation rate to be higher than expected the € began a sharp two day rally against the greenback and interest rates have spiked sharply with the benchmark German 10 yr Bund hitting nearly 1.00% in early trading this morning.
Rates in the US are also higher, with the 10 year Note at 2.40%, the highest level in over 8 months, but there’s no doubt that the driver for both currencies and rates is the Eurozone and the feeling that they have beat back the devil of sub zero rates and negative inflation, at least for now.
Equity Investors have been mostly ambivalent to the sharp spike in yields (at least until this morning), as they struggle to measure the positives of a more consistent upturn in the economy against the headwinds of higher rates and borrowing costs. Of course, should sentiment build that the great bond market rally of the last 20+ years has finally run its course, there is always the possibility large macro asset allocation shifts from bonds to equities, but we’ve seen no hint of even the beginning of that so far.
Eventually this surge of volatility and volume in debt and currency markets will have its impact on equities.
This morning, S&P 500 futures are lower by 12 to 14 handles in response to the third day of heavy selling in the Eurozone bond markets. We’ve had many days this year when sharply lower openings were reversed or at least marginalized at the first textbook support level. Watch S&P 500 2100 and Russell 2000 1250 as the first lines of support.
Beyond that, Embrace the Volatility!!. It’s sure beats sideways drift on no volume……Game On!!
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