EmailToday is Wednesday, euphemistically referred to in the states as "hump day" to signify its mid-week standing as a buffer between the prior weekend and the coming weekend. Get past hump day and we're on the downslide to another weekend.
For market participants, this isn't any ordinary hump day. This Wednesday is packed with angst about what lies ahead, only that feeling has nothing to do with weekend social plans. This sense of angst, meanwhile, has everything to do with the outcome of the EU Summit where a framework for dealing with Europe's debt crisis is expected to be announced.
Recent reports have indicated that participants should dial down their expectations for any impending announcement. That is not to say we won't get an announcement. Rather, the reports are noting that a broad-reaching "solution" could still be short on specific details.
As noted previously, there appears to be agreement in the EU that three things need to happen: (1) institute a bank recapitalization plan (2) increase the size of the write-down for private sector holders of Greek debt and (3) boost the impact of the EFSF.
How the EU gets there is still a mystery and therein lies the angst for the market. Inquiring minds want to know, but there have been so many conflicting reports on the status of negotiations that it is truly anyone's best guess as to what the European cognoscenti will fashion in Brussels to satisfy the masses -- assuming they can cull together a credible plan.
Many pundits have said this meeting is likely to disappoint; moreover, the contextual nature of the breaking headlines last week and this week on the negotiations has been riddled with the same vibe of impending disappointment.
We draw these observations to our readers' attention, because the striking thing through it all has been the resilience of the equity market. Notwithstanding the growing calls that eurozone leaders seem poised to drop the ball this hump day, the market still managed to rally to its highest level in the last two-and-a-half months.
It has been a peculiar move in the sense that the recent rally was ignited by a renewed sense of hope that Europe finally got it and would fire off a bazooka rescue plan. Yet, with recent talk that Europe's plan may be more of a machine gun than a bazooka, the equity market continues to exhibit an air of resilience.
Granted the market did decline 2.0% yesterday, reportedly on worries about the EU plan, but it is worth remembering that move came on the heels of a 14% rally in three weeks.
Something else per chance then is going on. Might it be that participants are buying into the notion (literally) that Europe's crisis, warts and all, won't be akin to the Lehman Bros. experience? Perhaps it is the recognition that incoming economic data and earnings results have quieted the recession talk that permeated the marketplace in the wake of the U.S. debt ceiling debacle in early August.
In other words, the extraction of worst-case scenarios has in turn extracted some of the risk premium that had been embedded in the equity market.
There is still potential of course that eurozone leaders mess things up and a sharp reversal ensues in the short-term. Nonetheless, the tenor of the market last week and this week, in the midst of worrisome headlines about the EU negotiations, has been imbued with a spirit of hope in the potential of what this equity market could do if eurozone leaders don't mess things up.
To be sure, double-digit earnings growth provides a sound, fundamental foundation for an upside breakout, absent a breakdown in the EU's rescue plan.
In the interim, it remains wait and see.
We still wait on the grand plan from Europe; and we still see company after company exceed earnings expectations and incoming data shoot down recession claims. Boeing (BA), McKesson (MCK), and WellPoint (WLP) are a few of the blue-chip companies that posted positive earnings surprises today; meanwhile, the September Durable Goods report produced some pleasant surprises beneath the headlines.
Specifically, durable goods declined 0.8% in September (Briefing.com consensus -1.0%), driven by an expected drop-off in aircraft orders. Excluding transportation, though, durable orders jumped 1.7% (Briefing.com consensus +0.4%) with gains registered in all areas except communications equipment.
Importantly, nondefense capital goods orders excluding aircraft -- a proxy for business investment -- rose 2.4% on top of a 0.5% increase in August.
The S&P futures appear to be over yesterday's bump in the road. Currently, on this hump day, they are 0.9% above fair value.
--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.
