Stock index recovery rally proves best of both worlds

S&P stock index futures (CME:SPH14) had been higher by almost 4-points earlier following on from a dramatic rebound on Tuesday. As a result of the fight back against losses at the start of the trading week, the major U.S. benchmark is once again facing virgin territory. Investors were foiled Monday by a delayed reaction to weather-distorted employment data. A stronger yen (FOREX:USDJPY) raised a red flag and ushered in a bout of portfolio insurance causing the rising VIX index to accelerate fears.

All the while, bond yields pushed lower on panic-laden slowdown fears. Tuesday’s recovery rally for equities followed compelling evidence that the consumer remains exceptionally healthy, yet failed to put much of a dent in the benchmark 10-year (CBOT:ZNH14) yield as it rose to 2.87%, yet13bps below its level just ahead of the employment report. It appears investors are getting the best of both worlds with stocks poised to test record highs at the same time as borrowing costs fail to blink in the face of a reduction in the pace of Fed buying.

Wednesday is off to a bright start despite a slightly downbeat German GDP report as the economy expanded for the full year by just 0.4% rather than the forecast rise of 0.5%. Still, weak exports appear to be the cause as the Eurozone struggles to pull up its socks. And right on time, French PM Hollande today announced a €30 billion payroll tax cut to aid domestic companies recover lost competitiveness in the face of structural reforms and severe austerity measures. The dollar is back above ¥104.00 while the CBOE Volatility index remains sanguine at just 12.28.

The U.S. producer prices reading for December will hardly affect the world in its inflation torpor, while the potential market-moving report could be the afternoon release of the Beige Book from the Fed. The report is compiled across the 12 districts gauging sentiments across business channels to help sway the decision at the forthcoming FOMC meeting, the latest of which comes at the end of this month. It is likely to relay more of the same: Gradual economic expansion across an array of manufacturing and consumer businesses with few signs – if any – of slowdown. While the report discusses hiring prospects it is unlikely to deflect from last week’s downbeat report and as such could reinforce a sensation amongst investors that the climate offers them exactly what they have been used to – low yields and rising stocks – the best of both worlds.

Chart – Stock index futures continue to rally – March eMini S&P index +2.75 points

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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