U.S. equity markets are called sharply higher this morning following a strong surge to the upside, triggered by better-than-expected European industrial orders. All of this action reversed the huge sell-off from Thursday which was ignited by comments from Fed Chairman Bernanke, who described the economic outlook as “unusually uncertain”.
Stocks were trading flat to slightly lower overnight when data was released showing that industrial orders in the Euro Zone rose 3.8% in May from the previous month. Compared to the same month last year, sales surged 22.7%. Both results exceeded pre-report guesses. Economists were looking for a flat industrial growth number and a 20% gain in sales. Aggressive traders reacted to the reports with enthusiasm driving up demand for higher risk assets, sending the Dollar plunging and equity markets soaring.
The key will be whether U.S. investors jump on board after yesterday’s huge sell-off. U.S. investors have been hesitant to drive equity markets higher following a sharply higher opening. The tendency in the past has been to fade a sharply higher opening, while waiting for a reasonable pull-back. U.S. traders will most likely look for value especially after Bernanke painted a bearish picture with his testimony on Wednesday.
Today, traders will get a chance to react to weekly initial claims as well as potentially “rally-busting” existing home sales and leading economic indicators. Chairman Bernanke will also begin a second day of testimony at 8:30 a.m. central just as the equity markets open in New York.
The markets are expected to be volatile today given yesterday’s action and sudden turnaround last night.
Bernanke’s testimony drove September Treasury Bonds to a new high for the year on Wednesday as they solidified the thought that the Fed is likely to keep interest rates at historically low levels for a prolonged period of time. Last night’s development in Europe is pressuring the Treasuries this morning as traders shed so-called “safer assets”.
The U.S. Dollar is trading lower across the board as trader demand for risky assets soared following the news out of Europe. The release of the bullish industrial report combined with Bernanke’s dovish tone sends a signal to investors that the European Central Bank is moving closer to a possible rate hike while the Fed is still struggling with the possibility of a double-dip recession. Furthermore, the bullish Euro Zone numbers is a sign that the ECB is likely to refrain from applying additional stimulus measures while the weakening U.S. economic data means the Fed is likely to consider a second round of quantitative easing.
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