EmailThis isn't a volatile equity market. It is an extremely volatile equity market.
The massive swings are symptomatic of a market that is racked with uncertainty and where every rumor is treated as truth until the real truth can set one free from the rumor. The cycle soon begins anew, though, when the next rumor hits the wires.
Currently, the market is confronting rumors about a possible banking crisis with systemic implications unfolding in Europe. Given the experience following the Lehman Bros. bankruptcy, a sell-first-ask-questions-later is taking hold.
We are seeing this play out again this morning.
Festering worries about European banks' sovereign debt exposure have wiped out earlier gains in European bourses. That turn, and a turn of events that has included news Europe is considering a ban on short selling and a Reuters report, highlighted by CNBC, that a bank in Asia has cut credit to French lenders, has weighed heavily on sentiment in the early-going since it sounds all too similar to some of the scary-sounding headlines that hit the wires in the midst of the 2008 financial crisis.
The S&P futures, which had been up as many as 25 points in the overnight trade, were down as many as 18 points a short time ago.
At the moment, though, they are on an upswing and charging hard, reclaiming about 18 points in the last 15 minutes.
The cash market, therefore, is slated for a weak a relatively flat start, but some specific stories like Cisco (CSCO), which posted better-than-expected earnings results and better-than-feared guidance after the close yesterday, are slated to shine. Shares of CSCO are indicated 12% higher in pre-market action.
On the economic front, initial claims for the week ending August 11 were better than expected, falling 7,000 to 395,000 (Briefing.com consensus 409,000). The latter number suggests nonfarm payrolls could exceed 100,000 in August, yet there still isn't enough distance between that number and the 400,000 mark to suggest there will be a strong enough pickup in hiring activity to reduce the unemployment rate in a meaningful way.
It is worth noting that initial claims have been steadier of late, which is a trend certainly worth watching given its leading indicator status. The market has been reluctant to embrace seemingly good news, but incoming data in subsequent weeks will take on added importance as a guidepost that helps substantiate whether the market's burgeoning recession concerns have been overblown.
That brings us to the trade balance report for June. It is a dated report (we're nearly half way through August), but nonetheless, it plays right into the slowdown concerns.
Briefly, the trade deficit widened by $2.3 bln in June to $53.1 bln (Briefing.com consensus -$48.0 bln). The sticking point is that both exports and imports declined in June, only exports (-$4.1 bln) widened more than imports (-$1.9 bln).
The drop in both exports and imports will be seen as a sign of a global slowdown. Moreover, with the BEA estimating a $52.0 bln trade deficit for June in the Q2 GDP report, the wider deficit reported today will lead to a downward revision for net exports in the second estimate for Q2 GDP.
It is pointless to try to call the direction of the market with volatility being what it is. This is an environment where the market moves for reasons both known and unknown, so the best we can say is that one can expect more rumors -- both good and bad -- and more volatility.
--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.
(Note: I will be taking a Page One hiatus until Monday, August 22.)
