Sharing The Pain?

Daily State of the Markets 
Monday Morning – November 29, 2010  

After a rousing pre-Thanksgiving rally driven by the reality that the economy in the United States does appear to be recovering from the “soft patch” experienced in the summer, fear and uncertainty returned on Friday. Although it was a shortened session, Friday’s trade was simple: With talk of the EU wanting bondholders to share in bailout pain came the fear that Ireland might start defaulting on debts as early as Monday.

Up until this point in the European debt crisis, bond holders have been held sacrosanct as no one has wanted to even consider the far-reaching consequences of a sovereign default. From where we sit, it appears that the majority of the efforts by the EU/IMF have been tied to the avoidance of just such a financial calamity.

However, the discussion changed on Friday and with it came another bout of selling. Although everyone expected to see a formal deal between the EU and IMF by Sunday (which did indeed occur), there were reports out of Europe on Friday that the powers-that-be were looking at ways to try and force senior bondholders to share in some of the pain involved with rescuing Ireland’s banks.

We now know that this discussion was tied to future bailout plans as the EU announced Sunday that there would be a new approach for bailouts occurring after 2013. And we now know that the bailout deal for Ireland included no such measure. However, with trading desks barely manned and the NYSE scheduled to close early, those interested in trading favored the sell side on Friday.

From a technical standpoint, it appears that last week’s volatility was merely a continuation of the current consolidation phase. And with the S&P trading in a range between 1178 and 1200, the lines in the sand are fairly clear at this point. So, until one of the teams can find a reason to break on through to the other side of this little range, we’re going to assume that the corrective phase that began on November 8th will continue.

Turning to this morning… A rather robust start to the holiday shopping season in the U.S. and the deal with Ireland seemed to put traders in a good mood in the early going. Asian markets responded rather positively and European bourses were in positive territory. However, a report out of the UK showing that money supply is barely moving and a weak bond auction in Italy has put traders back into uncertainty mode.

While the EU can apparently handle problems in places like Greece, Ireland, and Portugal, Italy and/or Spain might be a horse of a different color. So, with markets up nicely on the year, traders may be thinking about selling first and asking questions later.

On the economic front… We don’t have any data scheduled for release today. However, we will get a healthy batch of data as the week progresses with the Big Kahuna – the Jobs report – due out on Friday.

Finally, be sure to take time to breathe today while doing all that cyber-shopping…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.35%
  • Shanghai: -0.19%
  • Hong Kong: +1.26%
  • Japan: +0.86%
  • France: -1.04%
  • Germany: -1.17%
  • London: -0.85%

   

• Crude Oil Futures: + $0.84 to $84.70
• Gold: + $1.00 to $1363.50
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.831%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -3.70
  • Dow Jones Industrial Average: -42
  • NASDAQ Composite: -9.96  

Wall Street Research Summary

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