EmailChristmas came early for the bulls, as the U.S. equity market surged 3.0% Tuesday on the back of favorable developments out of the eurozone and better-than-expected housing starts data.
The former was more impactful than the latter in our estimation, simply because housing starts were fueled by a 25% increase in multi-family starts to meet increasing demand for rentals. It would be remiss not to add that single-family starts were up 2%, yet it is clear builders are still not convinced a strong recovery in the housing market is in the offing.
In any case, the starts data were still a positive input for Q4 GDP, which is shaping up to be stronger than most people feared in October when the eurozone debt crisis heated up as Italy got called to the mat.
Things have cooled down some since then, but the debt crisis is still a long way from being frozen.
On a related note, the ECB reported today that 523 banks borrowed a combined EUR 489 bln at its 3-year long-term refinancing operation (LTRO). That was well ahead of expectations, which were closer to EUR 300 bln, and ahead of the roughly EUR440 bln that was borrowed at the first one-year offering in 2009.
The strong uptake on the 3-year offering is good in the sense that it should ease liquidity concerns. At the same time, it is disarming to know so many banks tapped the facility.
The $64,000 question is, what will the banks do with the money? Some participants are hopeful they will use it to buy Italian and Spanish bonds; others think they may simply use it to cut their own risk or to rebuild their capital.
More will be learned in coming weeks, though it would be rash to make snap judgments now knowing how liquidity demands typically swell at year end.
Our lone, yet important, point is that the 3-year LTRO may have been a reactive measure, but it is here now and it stands as a proactive facility to keep liquidity concerns at bay, which is a necessary step as the eurozone addresses solvency issues.
It appears, however, that the futures market isn't seeing any silver lining right now as it relates to the ECB. That is because it is fixed on the ECB buying eurozone bonds infinitum as the only complete solution. There are opposing views on that point, the loudest of which comes from the ECB itself, yet the market continues its pushback.
Currently, the S&P futures are 0.2% below fair value.
There won't be a lot of selling pressure at the open. By the same token, there won't be a lot of follow-through buying either.
Disappointing earnings reports from Oracle (ORCL), CarMax (KMX), and Walgreens (WAG), all of which missed consensus earnings estimates, are acting as a restraining influence along with the recognition there was such strong demand for the ECB lending facility.
The report from Oracle has drawn the most attention on the corporate front, first because Oracle hasn't missed in some time and secondly because its fiscal third quarter guidance spoke to weakening levels of IT demand. Shares of ORCL are trading 10% lower in premarket action.
On a better note, Nike (NKE) is up 2% in premarket trading after the athletic footwear/apparel company topped the Capital IQ consensus estimate by three cents and reported a 13% increase in worldwide futures orders.
As most readers know, earnings news has taken a back seat to macro developments for some time. That will probably remain the case for the most part today, although we expect earnings results to gain more luster from a market-moving standpoint in coming weeks as participants look to glean whether the macro picture has become more fact than fiction when it comes to earnings prospects that were regularly, and wrongly, short-changed throughout 2011.
The existing home sales report for November (Briefing.com consensus 5.03 mln; prior 4.97 mln) will be released at 10:00 a.m. ET. It promises to make some noise because the National Association of Realtors has indicated it is going to revise home sales data for the past four years due in part to double-counting errors.
That effectively means the housing market is weaker than the previous data suggested. Sorry to end on such a downer note.
--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.
