After posting a significant rally on Monday, U.S. equity markets were uneventful yesterday as the Dow, Nasdaq, and S&P 500 indices were virtually unchanged. This could continue today and leading up to the full employment report coming on Friday morning. We will get a taste of the employment picture today with the release of the Challenger Job Cuts and the ADP Employment Change, along with Initial Jobless Claims on Thursday. However, the Unemployment Rate and the change in payrolls on Friday remain the highlight during a week with plenty of economic data. Back to the equity markets, the S&P 500 has now closed above 1110, a key resistance level in technical analysis, each of the past two days. This implies, perhaps, that equities are poised to begin another leg upwards which could propel the major indices into positive territory for the year. Obviously a better than expected employment report later this week could provide the catalyst the market is looking for to make its move. The theme for the recent run-up has been a handful of announced M&A deals across various sectors, spawning optimism that economic conditions have and will continue to improve. M&A is clearly a sign of confidence and market participants are jumping on that trading theme.
In other news, Greece’s government has passed significant measures to reduce the country’s debt by roughly $6 billion. This move not only improves Greece’s balance sheet, but opens the door for assistance from other Euro nations to help bailout Greece. This is certainly good news for global markets, but I don’t believe we’ve heard the last of the problems with Greece and the other PIIGS.
On the treasury front, price and yields have remained quiet this week after sustaining a significant rally last week. From a technical perspective, the 200-day moving average on the ten-year treasury is a 3.55% yield, which currently represents an extremely solid resistance level. Yields have approached this level three times over the past four months only to move higher in the following days. Keep an eye on the ten-year yield as a move below 3.55% could trigger a further decline in yields. Interestingly, we talked above about a better than expected employment report propelling equities higher. However, a weaker than expected report could prove to be the catalyst that pushes treasury yields below the key resistance levels. Stay tuned!
On the fixed income front, we have had a number of clients sell higher coupon FNMA and FHLMC 30-year mbs as well as ARMS and IOs in anticipation of the announced loan buyouts. The bid side remains surprisingly strong for this paper on lack of supply, as larger buyers of mbs need paper and are willing to risk the potential for markedly higher prepayment speeds. As mentioned in this piece over the past few weeks, please call us to help analyze the impact to your mbs portfolio. In addition, we have also had clients look at 2-4 corporates once again on a selective basis for short duration asset alternatives, while selectively adding tax-exempts and taxable Build America Bonds, taking advantage of cheaper mispriced deals.