Once again yesterday as the stock market rallied, the S&P 500 failed to achieve a new high, falling short by 2 points. Early this morning US stock indexes were weaker implying a weak open at 9:30. In Europe all the major markets are weaker. Italy has political issues---again, the Italian 10 yr note at its highest rate in months on political turmoil; in Germany their 10 yr bund at 1.29% is the lowest in months. Safe haven moves sending US interest rates lower this morning; the 10 yr note walked right through its 1.90% technical resistance and at 9:00 this morning at 1.86% -5 bp frm yesterday’s close. 30 yr MBS price at 9:00 +28 bp frm yesterday’s close.
Cyprus banks’ insolvency is bringing back focus on the EU banks, particularly in Italy and Spain.Cyprus is expected to open banks tomorrow with controls on withdrawals; in the end regardless of how long it takes most deposits will be gone frm the remaining “good” bank. Who will want to keep their money in Cyprus banks? Some estimates are now saying that as much as 40% of large depositors funds may be lost in the bank deal worked out over the week-end. The EU experiment has once again clearly demonstrated that without parity in the economies that make up the Union, the Union is unlikely to stabilize; it will always be that way. An on-going series of eruptions will continue the hold the region down in terms of economic growth. The have countries are not likely to continue support for the have not’s as they have over the last three years.
Here in the US, the stock market rallied strongly yesterday (DJIA +111) but the broad market as measured by the S&P 500 index failed again to make a new high. Yesterday the market overlooked the dramatic decline in Mar consumer confidence, today maybe not so much. The index of confidence from the Conference Board fell to 59.7, the weakest since last Dec. Consumer confidence is critical for the outlook on consumer spending; the fall in confidence along with the increasing concerns over the EU is pressuring stock markets this morning. The run back to safety in treasuries and German bunds is increasing. That the S&P failed on five occasions over the last three weeks to break into new highs is now beginning to worry investors. Even the most bullish traders and investors have been calling for a correction in the market, today may be the beginning.
At 9:30 the DJIA opened -62, NASDAQ -23, S&P -9; the 10 yr note at 1.86% -5 bp and under the 1.90% resistance level. 30 yr MBS price at 9:30 +28 bp frm yesterday’s close.
The only data today, at 10:00 Feb pending home sales from NAR; the estimates prior to the release were for sales to be down 0.7%. NAR said sales pending sales fell 0.4%; yr/yr +8.4%. Pending sales are contracts signed but not yet closed. The NAR said the decline was primarily due to the lack of inventory that keeps sales down. Earlier this morning the weekly MBA mortgage applications were better after two weeks of decline; better interest rates improved the composite index 7.7% the refinance index +8.0% and the purchase index +7.0%.
At 1:00 Treasury will sell $35B of 5 yr notes; yesterday’s 2 yr auction was somewhat disappointing.
A bevy of Fed officials will be speaking today; 11:30 Charles Evens, Chicago Fed Pres.; 11:30 Eric Rosengren, Boston Fed Pres.; 12:15 Sandra Pianalto, Cleveland Fed Pres.; 1:00 pm Narayana Kocherlakota, Minneapolis Fed Pres.
The bond and mortgage markets have new life; technically we had resistance at 1.90% and Apr 30 yr Fannies resistance was at 103.03. Both markets have broken those levels. It is back to safety with the increasing troubles re-surfacing in the EU. The next resistance level for the 10 yr is at its 100 day average at 1.84% (at 10:00 the 10 is at 1.85%). After six months with no serious issues in the EU, the region is now back as a crucial driver for equity and bond markets—here and in Europe. Continue to float this morning; so far today the stock market is adding to the momentary support for lower US interest rates.