MARKET WRAP – COMPLACENCY BEGINS TO CATCH UP WITH INVESTORS

We’ve been highlighting the tremendous global risks in recent weeks and U.S. equity investors have remained in their domestic bubble of complacency throughout.  As usual, Americans were keenly focused on domestic strength when deterioration in Europe and China appeared to be front and center in the global economy.  That complacency finally caught up with investors today when S&P downgraded Greece and Portugal.  Chinese equities were already week overnight on continuing fears of a government induced slow-down, but the pressures picked up globally when word of the downgrade smacked European stocks for 2.5%+ losses.  U.S. stocks were not immune to the downturn as the S&P took a 2.4% hit.

Volume was VERY heavy on the day and breadth was deeply negative at 5:1.  Investors have been hoping (and betting) that the problems in Greece will go away, but these are structural economic problems within the EU monetary system.  They are not only NOT going away, but are likely to continue pressuring the economy in Europe. The worst news for equity investors is that most investors are still very long stocks and today’s downturn did little to alleviate the very oversoldbought conditions.  I have incorrectly maintained that the risks in this market are extremely high over the course of the last month.   Was this a shot across the bow?  Only time will tell.

From Daily Futures:

Currencies – Situation In Greece Worsens
The situation for Greece got worse today after Standard and Poor’s cut Greece’s debt rating from BBB+ to BB+ with a negative outlook. The rating for Portugal was also lowered, from A+ to A-. The June eurocurrency fell 1.36 cents to $1.3209.

U.S. Economy
The S&P/Case-Shiller index of home prices in twenty cities was down .9% in February, but up .6% from a year ago, a little lower than expected. The June U.S. T-bonds jumped up 1.18/32nds to 118.14/32nds, their highest close this year with investors spooked by the news out of Europe.

The Conference Board said that its index of consumer confidence increased from 52.3 to 57.9 in April, better than expected and the highest level since September of 2008.

The Federal Reserve of Richmond’s regional index of manufacturing increased from +6 to +9 in April, as expected.

The U.S. Treasury sold $44 billion of two-year T-notes at a median yield of .98% with a bid-to-cover ratio of 3.03.

The Federal Reserve began its two-day meeting today – will there be any new hints tomorrow?

Grains and Cotton
Late yesterday, the USDA said that:
50% of the corn crop was planted.
43% of the spring wheat was planted.
16% of the cotton crop was planted.
69% of the winter wheat crop was rated good to excellent, the same as a week ago.

The USDA said that Egypt bought 120,000 tons of U.S. corn for the current 2009-2010 season. July corn closed down 5.75 cents at $3.537, its lowest close in seven months, weighed down by the rapid planting progress and influence of outside markets.

According to Bloomberg news, China’s government said that they will need another 310,000 tons of cotton before this fall’s harvest. July cotton fell .69 to 85.20.

Livestock
June hogs were one of the few commodities that closed higher today as improved world demand and lower U.S. hog numbers prove to be a powerful combination. The June contract ended up .67 at 84.95.

June cattle closed down 1.77 at 93.72 in spite of Friday afternoon’s positive on-feed numbers.

Metals
July copper fell 16.55 cents to $3.3825, the lowest close in four weeks, pressured by today’s news from Europe. June gold, on the other hand, finished up $8.20 at $1,162.20, possibly seen as a flight to safety.

Energies
June crude oil dropped $1.76 to $82.44, pressured by today’s higher dollar and expectations for an increase in tomorrow’s weekly inventory report.

Other
Real GDP in South Korea was up 7.8% in the first quarter from a year ago, the best annual gain since 2002.