U.S. stocks spent most of yesterday’s session lower – the broad market had dropped another 2.25% at the day’s worst – as contagion concerns in Europe remained heightened and the broad market fell closer to the next so-called technical level of support.  But then out of nowhere, came a late-day surge of 4% to deliver a positive close.   

So what caused the market to surge 4% in a matter of 20 minutes?  Apparently, it was an FT story that explained EU Finance Ministers now understand they haven’t done enough to “fix” the debt crisis.  Thus, there’s a view those policymakers will do more, even as the latest two-day meeting ended without agreement on anything – more vague promises.

European bourses have gotten annihilated – the backbone economies of the eurozone have seen their main equity markets slump 30% since May – as their policymakers continue to kick the debt can down the road and their banks have neither shored up capital positions nor marked the junk sovereign debt on their books even close to where the market has it.  What’s more, banks that passed the so-called EU stress tests, such as the French/Belgian bank Dexia, are suddenly scrambling for more government assistance – it’s the canary in the coal mine. 

More below…

Market Activity for October 4, 2011

Sector Activity for October 4, 2011

While hopes that European Finance Ministers will magically make their problem all go away dominated the headlines in the afternoon, Bernanke was the topic in the morning. The market came off yesterday’s lows as the Fed chairman took questions from the Senate Joint Economic Committee and said the Fed is ready to take additional steps to boost U.S. growth.  Since everyone now knows there’s nothing the Fed can do to spur economic growth it’s universally known as a directive toward stock prices. 

Now, his statements weren’t enough to stage a rally as he refrained saying more QE was in store, instead sticking to more mild measures.  But this is how he gets started, laying the ground work and then once stock prices fall to a level in which a collective scream for more help ensues, that’s when more QE will arrive.  While the Bernanke effect isn’t what ultimately drove the market higher, you could see it had an effect in the way the sectors behaved

That effect was seen in the groups that outperformed yesterday.  Basic materials, consumer discretionary and energy were among the day’s winners – this is exactly where the traders will flock when the Fed gives the signal that more QE is coming.  Utilities, telecoms and health care were the session’s losers. 

The CRB Index has slid below that 300 level and surely looks headed for the 275 mark that, in my view, will coincide with a 1000-1025 print on the S&P 500 and the point at which the Fed goes big bang.  For a while now we’ve cautioned those with a desire to go all-in on the inflation trade (buying commodities, basic material shares and Aussie and Canada with a vengeance) that we’re likely to get another slump in commodity prices before the Fed come to the economic “rescue” again and fires all of these prices back to their recent highs – sorry consumers.  

Factory Orders

Factory orders slipped 0.2% in August (the fourth decline in eight months) after the 2.1% increase in July.  But the reason we watch this quite outdated report is for the revision to the month’s durables orders – instead of having to wait another two weeks for the following month’s durables report for that previous-month revision, this report gives us a heads up. 

Headline durable goods orders along with the ex-transportation figure were unrevised at -0.1% for August.  The nondefense capital goods ex-aircraft number (the business-equipment spending proxy of the report) was revised down to 0.9% from the 1.1% estimated last month. 

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Have a great day!

Brent Vondera, Senior Analyst