Market Commentary

Equities were quiet Friday.
June 21, 2010

Equities were quiet Friday.  In my view perhaps the most significant aspect from Friday was the European Union’s decision to publish the results of the stress tests of the regions banks in a bid to increase transparency.   In my view this is a welcomed first step even though many will want to know how tough the terms were of this stress test.

As history now suggests, the stress test conducted and released on American banks was a major reason why the American financial system stabilized March 2009.

The results of this test will not be known until the end of the July hence suggesting the issuance of bank/sovereign debt and commercial paper will be the best indicator of the liquidity or health of the European/global banking system.  As noted Friday Spain had a successful debt offering last week and LIBOR declined nominally thus inferring confidence leading into the weekend.

While I have no reason to make this statement, I think the health of European banks will surprise investors for up to Friday the EU was determined to keep the results of the tests private.  Why the surprise change?

Earning pre warning season starts today.  Market momentum is dictated by the consistency of news flow.  To state the obvious, positive news increases the odds of a rising market and vice versa.

The last six weeks have been extremely ugly, the result of an unending stream of negative news….flash crash, Greece, BP, etc.  As noted last week I think the vast majority of the immediate known negatives are discounted and barring any major externality the news should continue to improve.

It is against this back, amplified by the outsized influence of quantitative trading, I think the odds are about 50% the averages will challenge 2010 highs during the next six weeks.  Market leaders may be the basic manufacturers and the financials, two segments that have been volatile during the last six weeks.

I think that once the [positive] results of the stress tests of European Banks is known, I think the averages could come under some profit taking under the guise of buy on rumor and sell on fact.  Moreover a strong earning season would be concluding.

I then think August will be as all begin to question when the Federal Reserve will alter monetary policy.

Speaking of monetary policy, the two day Fed meeting ends Wednesday.  No change in monetary policy is expected but obviously all will dissect its post meeting statement.  Other data points include new and existing home sales, a regional manufacturing survey, durable goods and weekly jobless claims.

Last night the foreign markets were up.  London was up 1.65%, Paris up 1.66% and Frankfurt up 1.48%.  Japan was up 2.43% and Hang Sang up 3.08%.

The Dow should open sharply higher as China signaled it will relax the Yuan’s fixed rate to the dollar.  The 10-year is  off 16/32 to yield 3.28%.