All Eyes on Equities

The dramatic reversal of US shares yesterday in the last hour of trading
has once again pulled the proverbial rug beneath the feet of investors. 
turn down, moreover, occurred near important technical levels, seemingly adding
to the significance.  

Global equities have followed suit.  The MSCI Asia Pacific Index
fell 0.8%, despite a 2% rally in Chinese markets re-opening after the holiday
celebration.  European bourses have been market down and the Dow Jones
Stoxx 600 is off by little less than 1% in late morning turnover.  That
said, European shares opened lower still but have stabilized, perhaps waiting
for fresh cues from the US markets.  The S&P 500 is straddling
unchanged levels. 

The S&P 500 traded on both sides of Tuesday’s range yesterday and
closed below its low.
  The outside down day is bearish price
action.  The S&P 500 was unable to take out Monday’s high and it just
nicked the 2743-level we have identified as key.  The S&P 500 had
bounced from 2532.7 to 2754.4 since February 9.  Before anticipating a
return to the lows, there are some mile markers on the way that will be
watched. First, the 2669.7 area is a 38.2% retracement of the bounce and 2643.5
is 50%.  Similar levels for the Dow Industrials are found at 24640.8 and
24396.3 respectively.

 The VIX actually closed a little lower yesterday (20.02 vs. 20.60). 
It is slightly firmer today but it is below the 21.6 high seen at the start of
the week or even the 21.0 seen yesterday.   Meanwhile, the Treasury
market has steadied.  Yields are off 1-3 bp through coupon curve.  It
has a great deal of new supply to digest, and there is another $29 bln
(seven-year notes) that will be raised today.  When looking at the price
action closely, it as if the S&P 500 made its highs about 25 minutes after
the FOMC minutes were released, and did not slip to new lows for a little more
than half an hour.  The 10-year yield initially slipped a basis point, but
then climbed.  Yields peaked a little before the S&P 500 made new lows
for the day.  

We do not see much new news in the FOMC minutes.  The January
meeting was seen in real time as a hawkish hold and the statement reflected an
upgraded economic assessment and greater confidence that inflation would move
toward target.  It seems clear that the fiscal stimulus helped boost the
near-term confidence.   While much attention has been devoted to debating
whether the March dot plots will point to four hikes this year instead of
three, which was the case in December, seems, the fact is that the Fed funds
futures are not fully pricing in three hikes this year.   That gap
between the market and the Fed is closing gradually, but remains and it is that
adjustment that seems key for the investment climate.  

We have argued that there is an accumulation of evidence that the US
economy is showing some classic sign of being late in the expansion
These included, metrics like the 12-month moving average of
non-farm payrolls, auto sales, credit card delinquencies, and financial
speculation (cyber-currencies?).  The eurozone economy in contrast was
seemingly accelerating.  However, after softer PMIs, Germany reported
softer ZEW and weaker IFO survey, and France reported all its February business
confidence readings decline in February.  Of note, the German IFO
expectations component fell the most in two years (105.4 from 108.3) and is at
its lowest level in five months. 

The US dollar is mixed.  The yen is the strongest currency, up
0.4% followed by the dollar-bloc, up about 0.2%.  The Scandia and sterling
are nursing small losses, while the euro is flat after having fallen to$1.2260,
a ten-day low, in early European turnover.  There is a large ($1.4 bln)
option struck at JPY107.50 that expires in North America today.  We
suspect the greenback will take its directional tone from the equity

The US economic data is not what moves the market today, with initial
jobless claims the leading economic indicators, and the KC Fed’s manufacturing
   In light of the minutes, Fed officials may draw
attention.  Quarles has already spoken and in his first public remarks
recognized the economy is strong than before the crisis.  NY Fed’s Dudley,
though it is less than six months before he steps down, he has often had his
finger on the pulse of Fed thinking (10 am EST) and Bostic and Kaplan speak

Canada reports December retail sales.  The headline is expected
to have been restrained by weaker auto sales, without which retail sales may
have risen about 0.3% after the heady 1.6% rise November.  The market
continues to discount a little less than a 50% chance of a hike in April. 
The US dollar has risen from CAD1.2550 to CAD1.2710 in the past five
sessions.   It overshot our retracement target near CAD1.2665, but
has come back offered.  A move back below the CAD1.2660 area may suggest a
near-term top is in place.  

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