EmailBy any objective measure, a 3.4% gain for the S&P 500 in two days is a stellar return. The sticking point right now is that there are a lot of subjective views as to why that gain will, or will not, hold up.
The hope and the cynicism are both tied to Europe's resolve to pass a plan that would effectively signal to the market that policymakers will not allow sovereign debt issues to bring down the European banking system.
Strikingly, the gains this week have followed a lot of talk that eurozone officials are backing a solution that calls for a leveraged European Financial Stability Facility, otherwise known as a bailout fund on steroids. So far, though, the action has yet to come to fruition.
At this juncture, the formulation of this idea is more like a movie where the actors are in place, the scene is staged, and the director yells "action!" only to yell "cut!" when things don't go just right.
Yesterday, the market heard the "cut!" call when the Financial Times reported that there is growing dissension in the ranks over the degree of the private sector's participation in the Greek bailout.
Coincidentally, it has been reported that participation in a Greek debt swap that comes with a 21% haircut for investors has now reached the 90% target. Most likely, the participation in that plan has been catalyzed in recent weeks by the thought that investors might ultimately be staring at a much larger haircut. That was the gist of the FT article, which highlighted complaints by German officials in particular that the private sector still needs to bear more of the bailout burden in spite of the original 21% haircut proposal.
These headlines triggered a late selloff Tuesday that significantly cut into the market's gains. Still, the gains did not disappear altogether as the market managed a 1.1% gain for the session.
The early indication today is that the market will start the session on a modestly higher note. Bullish enthusiasm has been reined in a bit by a mixed showing in foreign markets and burgeoning concerns that European officials could find a way still to destroy the market's confidence in the newfound sense of bailout enlightenment.
Even so, the lack of concerted selling interest suggests there is still a belief that this movie will get made. A pivotal scene will be filmed tomorrow when the German parliament votes on the expanded EFSF.
Separately, the Durable Orders report for August has provided a measure of support this morning, too. Granted it showed a 0.1% decline in both total orders, and orders excluding transportation, but the underlying detail did not support a picture of an economy that is spiraling into recession.
Nondefense capital goods orders excluding aircraft -- a proxy for business investment -- jumped 1.1% after a 0.2% decline in July. Shipments, meanwhile, increased 2.8% on top of a 0.4% increase in July. The shipments number factors directly into GDP and should provide a boost to third quarter GDP estimates.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
