It is going to be a strong start for the equity market today.  The S&P futures are up 16 points and are trading 1.3% above fair value.

We've been down this road before in recent sessions, only to see the opening gains fade throughout the day in low-volume selloffs that are perhaps a function of tax-loss selling as much as they are a function of concerns about the macro outlook.  Accordingly, the thing to watch today for traders isn't so much how the market opens as it is how the market closes.

The opportunity for a bargain-hunting bid has been enhanced by a 4% decline over the past six sessions and a notable improvement in eurozone bond markets. 

Italy and Spain have seen yields on their 10-year notes drop 35 bps and 25 bps since Friday to 6.19% and 5.11%, respectively.  Reports are attributing today's early strength in the futures market to Spain's stronger-than-expected 3-month and 6-month bill auction.

That is some legitimate attribution, too, considering Spain sold EUR 3.72 bln in 3-month bills and EUR 1.92 bln in 6-month bills at an average yield of 1.735% and 2.435%, respectively, versus average yields at the prior auction of 5.111% and 5.227%.

Participants have been inclined to think the sharp drop in yields is related to demand by banks in front of the ECB's 3-year long-term refinancing operation.  There will be more clarity on that assumption tomorrow when the ECB releases the results of that liquidity operation.

In any case, and for whatever reason, the drop in eurozone bond yields is being looked at favorably, because it sure beats the alternative.

A better-than-expected German business confidence reading for December is another factor underpinning the market this morning.  The added twist is that business confidence in Germany was not just better than expected, it was also up from November, rising to 107.2 from 106.6 and accented by the biggest jump in the expectations index since July 2010, according to Ifo in a report from Reuters.

It hasn't hurt either that the November Housing Starts report was also better than expected.  Led by a 25.3% jump in multi-family starts and a 2.3% increase in single-family starts, housing starts rose 9.3% from October to a seasonally adjusted annual rate of 685,000 (Briefing.com consensus 627,000).  Excluding the effects of the homebuyer tax credit, that is the highest level of starts since October 2008.

Building permits jumped 5.7% to a seasonally adjusted annual rate of 681,000 (Briefing.com consensus 633,000).  With this number a good bit above the consensus estimate, there is a good chance of an upward surprise for the Leading Indicators report for November (Briefing.com consensus +0.3%) on Thursday.

Importantly, the number of units under construction increased for the third consecutive month and is now at its highest point since January. This bodes well for the construction spending component for fourth quarter GDP.

These positive developments have overshadowed the news that AT&T (T) is dropping its bid for T-Mobile, and is taking a $4 bln charge as a result of the failed deal, as well as the continued rancor and lack of an agreement in Congress over an extension of the payroll tax cut.

The latter may come back into focus in due course.  For now, the market's sight is set on a higher open that will be aided by short-covering activity and we suspect murmurs of a possible "Santa Claus Rally" taking shape. 

As an aside, the Santa Claus rally period covers the last five trading days of the year and the first two trading days of the new year, so that period doesn't technically begin until Friday.  Nonetheless, it is an appealing vernacular this time of year, especially for a market that has looked very Grinch-like in recent sessions.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.