After a very shaky start to the week, markets are extending their gains for the second straight day, largely on alleviated concerns out of China. In addition to recent dovish comments from Fed officials here domestically, global markets have settled down considerably in part because of calming comments from the People’s Bank of China regarding its intention to stabilize a fragile credit situation.
With volatility abating slightly, investors are tentatively shifting their focus from central bank stimulus to economic optimism and the upcoming earnings season. Yesterday, we had a slew of very encouraging economic data come out: Case-Shiller report (April), New Home Sales number (May), Durable Goods print (May), and Richmond Fed (June). Today, however, the poor 1Q GDP revision from 2.4% down to 1.8% bolsters the case that the Fed will remain accommodative. Nevertheless, the recent batch of positive economic data has actually been bullish for equities, which could signal a very healthy sign for the back half of the year.
As of 10:55AM, the S&P 500 is up 0.7% to 1,599. The 1,600 handle will be the key level to watch today both technically and psychologically. Right now, all sectors are positive except materials. Treasury yields continue to flirt with the 2.5%+ level, as investors wait and see if this is the new normal. The S&P 500 is facing the prospects of its first down month in 8 if it does not reclaim 1,630 by Friday.
Areas Of Focus Today:
Concerns Ease In China – 1-year interest rate swaps in China fell 33 basis points to 3.75%, marking the biggest drop since November 2008. After reaching an all-time high of 5.1% on June 20, the turnaround suggests that tightening liquidity conditions in the Chinese banking system are set to reverse.
Disappointing GDP Revision – The economy is growing less than previously thought, as consumers spent less on services. GDP expanded at a revised 1.8% from January through March, down from an earlier estimate of 2.4%.The downward revisions were in consumer purchases, business investment, and exports. On the release, yields spiked downward a bit signaling continued bond buying from the Fed.
Gold Continues Sell-Off – Gold is down another 3% this morning, trading around $1,240/ounce. Earlier, it hit a low of $1,223. Gold futures are on track for a decline of 23% this quarter. A combination of dollar strength, economic progress, and central-bank expectations on asset purchases continue to weigh on prices.
Fed Speakers – The onslaught of speeches by Fed bank presidents and board members continues today with Richmond Fed President Jeffrey Lacker and Dallas Fed President Richard Fisher, who will appear before the House Financial Services Committee. The topic of the testimony is financial regulation and “too big to fail” banking.