Market Comment - July 14

(Marco Bonelli) The second day in a row, QE3 was the center of attention and the second day in a row the markets staged a dramatic intra-day reversal to the downside and closed at or near the lows of the day...


As QE3 just became a topic yesterday and the Fed just mentions it as an option in case the economy stays weak or keeps on weakening, it's too early to read anything into the stock market action the last two days. Having said that, it's one thing and no big surprise that the FOMC discusses QE3 in their meeting (as documented in the Fed Minutes) but by Ben Bernanke citing in his testimony in front of the House, that the Fed "remains prepared if an adjustment in the stance of monetary policy would be appropriate", the possibility of QE3 happening became more serious and therefore was a positive "surprise" to the market. In addition, Fed Governor Eric Rosengren mirrored the same message in a speech yesterday as well.

Although we are far away from anything real, the perceived liquidity effect in general lifted stocks and commodities in the first half of trading. Unfortunately there was no follow-through buying so the initial excitement didn't last as market activity is mainly dominated by short-term players who react to every resistance and support line on the minute charts for the SPX and NDX futures.

Here are just a few more details regarding commodities: Everybody saw gold breaking out to new all-time-highs, but almost all other commodities showed decent performances. The CRB index caught up all losses it saw in June and recovered half of the losses from the top beginning of May. While metals already started rebounded along with economic recovery hopes last week, grain commodities now also joined the party and regained more than half of their losses from June. To put this into a bigger picture: the FAO (Food and Agriculture Organization of the United Nations) Food Price Index rose 1% in June, which is a 39% y-o-y gain. The cereal component dropped 1% in June but is still up 71% y-o-y. So bottom-line, while QE3 will probably push various asset prices higher, higher cost from the commodity front will continue to hurt consumer spending and will put further pressure on companies margins.

Enough speculation and commenting about something that is all but certain to become real (referring to QE3), the reality that investors face now is earnings. Earlier this week AA reported and a few smaller technology companies pre-announced on the downside. Today we move into a different category as JPM kicked off the earnings report season for banks. Although it's hard to figure out the real deal once you weed through the complex structure of various business-units and try to get a sense of shifts in reserve positions, asset write-ups and downs etc., the numbers seem decent and the stock already trades higher in the pre-market.  I think the important message here is: Earnings for the banking sector have been discussed for quite some time and almost all comments were negative. So going into the earnings from financial companies, expectations are quite low, stock prices declined for several months and valuations appear quite attractive. The outcome could be that JPM beating reduced expectations and other banks showing similar results could easily trigger a nice relief rally in the sector!

For the overall market, let's see how long the current extreme volatility lasts. Most moves to the upside and downside in recent days were quite broad-based. Historically a phase like this often poses as a precursor for a substantial move in the market which could be either direction. Economic numbers were reported mostly in line, slightly better in one report, slightly worse in another, coupled with a few revisions but in summary it shouldn't be a distraction for the market. Investors will be able to fully concentrate on the earnings picture where JPM already sent positive signals but many eyes will be on GOOG after the close.

Trade well.


(Marco Bonelli is the Managing Director - International for CL King & Associate in New York. The opinions expressed are his own)