DIA -1.01%, SPY -1.04%, QQQQ -.73%
10-Year Treasury, +1/2 to yield 4.22%
Several stories were behind today's drop. First, there was a rumor that several hedge funds were in trouble due to excessive exposure to GM. Although this was never confirmed, traders nonetheless acted on the rumor. This rumor's negative effect on trader's behavior illustrates a current overall lack of confidence in the market. In a public statement, Morgan Stanley's CEO warned Morgan investors market conditions are difficult and would probably negatively impact the firms earnings next quarter. Delta airlines announced it may have to seek bankruptcy protection by the end of the year. Oil's continued climb above $50/bbl stoked fears of an economic slowdown caused by higher energy prices. Finally, there is some concern about tomorrow's report. Declining stocks led advancing stocks by a 2-1 ratio on both indexes.
The 10-year bond rose ½ to yield 4.22%. The bond market originally sold-off on an unconfirmed rumor that gains in Friday's employment report were largely due to a the Bureau of Labor Statistics death model. The bureau did not respond to this rumor. The bond market rallied strongly after the equities markets dropped about 2 PM Eastern, indicating a flight to quality occurred. Finally, a strong market for a $22 billion Treasury auction with a 40% indirect bidder rate (the average is 38%) indicated foreign demand for US Treasuries is still strong.
Oil rose 4 cents to close at $52.07/bbl. A refinery fire in Louisiana further increased investor's concern about the tight refining capacity's inability to keep pace with demand. In addition, an OPEC minister expressed concern that OPEC - which is already operating near peak production levels - would be unable to keep pace with demand should it pick-up towards the end of the year. However, the high level of US oil inventories is keeping some upward movement in check.
The dollar fell .23% versus the Euro and was virtually unchanged versus the Yen. Currency traders mainly kept to the sidelines today in anticipation of tomorrow's trade number. Although the dollar has strengthened versus the Euro since mid-April due to the US' better economic numbers, the trade deficit has created upward trade resistance around 1.28. Although Yen traders started taking profits over the last few trading sessions, the trade number has stalled this sell-off as well.