Short-Covering Activity Drives Up Market
All of the fear and loathing last week about the Sunday referendum in
Crimea was set aside today. Stock markets in Europe and the US rallied,
not because there was a de-escalation of the standoff in Ukraine, but
because there has yet to be an escalation of the standoff that would
threaten global economic growth.
As expected, Crimeans voted overwhelmingly in favor (95.5% of votes cast)
of joining the Russian Federation. As expected, the outcome of the
referendum was not accepted as valid by President Obama and EU leaders.
Still, there were two points of relief that sparked a short-covering rally
on Monday:
* Military force has not been used; and
* Hard-hitting economic sanctions have yet to be imposed
President Obama made a brief speech today to discuss a signed executive
order that freezes the assets and imposes travel bans on a small group of
advisors and allies of Vladimir Putin and only warned that more sanctions
would be forthcoming if Russia continued to push a provocative stance in
Ukraine.
Things have the potential to get more serious, but from the market's
standpoint, it hasn't been given reason yet in the aftermath of the
referendum to fear a worst-case scenario of economic sanctions being
handed down that would impede global GDP growth.
The latter consideration ignited a short-covering rally in European stock
markets that carried over to the US. Gains here were fast-paced off the
open as the Dow Jones Industrial Average sported a 205-point gain a little
more than 30 minutes after the opening bell rang.
The early rush of buying activity was helped along by a positive showing
out of China's stock market (+1.0%), which responded favorably to news of
a new urbanization plan. Separately, there were reports that the People's
Bank of China would expand the yuan's daily trading band to 2% from 1%. In the event of further yuan weakness, that would bode well for the country's exporters.
Basically, then, last week's main points of concern -- Ukraine and China -- were minimized, if only for a day. To be sure, plenty of questions remain about China's growth prospects and shadow banking system, as well as the path Russia will follow in Ukraine.
The gains in the US were broad-based. Every stock in the Dow Jones Industrial Average ended higher and so did every sector in the S&P 500. From a broader perspective, there wasn't any true weakness on Monday. Rather, weakness was couched in terms of which sectors were up the least. Gains for the major indices ranged from 0.6% for the Russell 2000 to 1.1% for the Dow Jones Industrial Average.
The stock market was underpinned throughout the day by quality leadership from some of its most heavily-weighted sectors. That included the technology (+1.3%), industrials (+1.3%), financial (+1.0%), and health care (+0.9%) sectors. The utilities sector (+0.6%) trailed all other
sectors, but it still made a respectable showing, particularly with interest rates rising at the back end of the Treasury yield curve.
Some of the weakness there followed an encouraging report that industrial
production increased 0.6% in February, bolstered by a 0.8% jump in
manufacturing production. The February strength came on the heels of a
0.2% decline in industrial production in January.
Separately, the Empire Manufacturing Index for March was slightly better than expected with a 5.6 reading (consensus 5.4). A number above zero denotes expansion. The NAHB Housing Market index, however, still reflected declining builder confidence with a reading of 47 for March. That was up from 46 in February but below the consensus estimate that called for a jump to 50.0, which is the dividing
line between rising and declining confidence.
Despite today's nice-sized gains for the major indices, participation in
the move was unequivocally light. Just 593 mln shares traded at the NYSE
versus a recent average of 706 mln shares. This was a tacit sign that
today's move wasn't so much a relief rally in unbridled form as it was a
short-covering move to account for a negative development that has yet to
live up to its advance, fear-based billing.
Tuesday's economic calendar will feature the Housing Starts (consensus 915,000) and Building Permits (consensus 955,000) report for February, as well as the CPI report for February. The consensus calls for total CPI and core CPI to be up 0.2% and
0.1%, respectively. After Tuesday's close, Oracle (ORCL 38.22, +0.62) and
Adobe Systems (ADBE 68.17, +0.98) will report their quarterly earnings
results.
* Dow Jones Industrial Average -1.95% YTD
* Nasdaq Composite +2.5% YTD
* S&P 500 +0.6% YTD
* Russell 2000 +2.1% YTD
* S&P Midcap 400 Index +2.3% YTD